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As we reported in our February 2014 report, since CSA was implemented nationwide in 2010, it has been successful in raising the profile of safety in the motor carrier industry and providing FMCSA with more tools to increase interventions with carriers. We found that following the implementation of CSA, FMCSA was potentially able to reach a larger number of carriers, primarily by sending them warning letters. Law enforcement officials and industry stakeholders we interviewed generally supported the structure of the CSA program, in part because CSA provides data about the safety record of individual carriers, such as data on inspections, violations, crashes, and investigations, that help guide the work of state inspectors during inspections. However, despite these advantages, our report also uncovered major challenges in reliably assessing safety risk and targeting the riskiest carriers. First, according to FMCSA, SMS was designed to use all safety-related violations of FMCSA regulations recorded during roadside inspections. For SMS to be effective in identifying carriers at risk of crashing, the violation information that is used to calculate SMS scores should have a relationship with crash risk. However, we found that the relationship between the violation of most of these regulations and crash risk is unclear, potentially limiting the effectiveness of SMS in identifying carriers that are likely to crash. Our analysis found that most of the safety regulations used in SMS were violated too infrequently over a 2-year period to reliably assess whether they were accurate predictors of an individual carrier's likelihood to crash. Specifically, we found that 593 of the 754 regulations we examined were violated by less than one percent of carriers. Of the remaining regulations with sufficient violation data, we found 13 regulations for which violations consistently had some association with crash risk in at least half the tests we performed, and only two regulations had sufficient data to consistently establish a substantial and statistically reliable relationship with crash risk across all of our tests. Second, most carriers lack sufficient safety performance data, such as information from inspections, to ensure that FMCSA can reliably compare them with other carriers. SMS scores are based on violation rates that are calculated by dividing a carrier's violations by either the number of inspections or vehicles associated with a carrier. The precision and reliability of these rates varies greatly depending on the number of inspections or vehicles a carrier has. Violation rates calculated for carriers with more inspections or vehicles will have more precision and confidence than those with only a few inspections or vehicles. This statistical reality is critical to SMS, because for the majority of the industry, the number of inspections or vehicles for an individual carrier is very low. About two- thirds of carriers we evaluated operated fewer than four vehicles and more than 93 percent operated fewer than 20 vehicles. Moreover, many of these carriers' vehicles were inspected infrequently. Carriers with few inspections or vehicles will potentially have estimated violation rates that are artificially high or low and thus not sufficiently precise for comparison across carriers. This creates the likelihood that many SMS scores do not accurately or precisely assess safety for a specific carrier. FMCSA acknowledged that violation rates for carriers with few inspections or vehicles can be less precise, but the methods FMCSA uses to address this limitation are not effective. For example, FMCSA requires a minimum level of data (i.e., inspections or violations) for a carrier to receive an SMS score. However, we found that level of data is not sufficient to ensure reliable results. Our analysis of the effectiveness of FMCSA's existing CSA methodology found that the majority of the carriers that SMS identified as having the highest risk for crashing in the future did not actually crash. Moreover, smaller carriers and carriers with few inspections or vehicles tended to be disproportionately targeted for intervention. As a result, FMCSA may devote intervention resources to carriers that do not necessarily pose as great a safety risk as other carriers. In our 2014 report, we illustrated that when SMS only considered carriers with more safety information, such as inspections, it was better able to identify carriers that later crashed and allowed for better targeting of resources. An approach like this would involve trade-offs; fewer carriers would receive SMS scores, but these scores would generally be more reliable for targeting FMCSA's intervention resources. FMCSA could still use the safety information available to oversee the remaining carriers the same way it currently oversees the approximately 72 percent of carriers that do not receive SMS scores using its existing approach. Given the limitations of safety performance information, we concluded that it is important that FMCSA consider how reliable and precise SMS scores need to be for the purposes for which they are used. FMCSA reports these scores publicly and is considering using a carrier's performance information to determine its fitness to operate. FMCSA includes a disclaimer with the publicly released SMS scores, which states that the data are intended for agency and law enforcement purposes, and that readers should draw conclusions about a carrier's safety condition based on the carrier's official safety rating rather than its SMS score. At the same time, FMCSA has also stated that SMS provides stakeholders with valuable safety information, which can "empower motor carriers and other stakeholders...to make safety-based business decisions." As a result, some stakeholders we spoke to, such as industry and law enforcement groups, have said that there is a lot of confusion in the industry about what the SMS scores mean and that the public, unlike law enforcement, may not understand the limitations of the system. Based on the concerns listed above, in our 2014 report we recommended that FMCSA revise the SMS methodology to better account for limitations in available information when drawing comparisons of safety performance across carriers. We further recommended that FMCSA's determination of a carrier's fitness to operate should account for limitations we identified regarding safety performance information. FMCSA did not concur with our recommendation to revise the SMS methodology because, according to FMCSA officials, SMS in its current state sufficiently prioritizes carriers for intervention purposes. However, FMCSA agreed with our recommendation on the determination of a carrier's fitness to operate, but has not yet taken any actions. As I will discuss later in my statement, we continue to believe that FMCSA should improve its SMS methodology. As we reported in our March 2012 report, FMCSA also faces significant challenges in determining the prevalence of chameleon carriers, in part, because there are approximately 75,000 new applicants each year. As mentioned earlier, chameleon carriers are motor carriers disguising their former identity to evade enforcement actions. FMCSA has established a vetting program to review each new application for operating authority submitted by passenger carriers (intercity and charter or tour bus operators) and household goods carriers (hired by consumers to move personal property). According to FMCSA officials, FMCSA vetted all applicants in these groups for two reasons: (1) these two groups pose higher safety and consumer protection concerns than other carrier groups and (2) it does not have the resources to vet all new carriers. While FMCSA's exclusive focus on passenger and household goods carriers limits the vetting program to a manageable number, it does not account for the risk presented by chameleon carriers in the other groups, such as for-hire freight carriers, that made up 98 percent of new applicants in 2010. We found that using data analysis to target new applicants would allow FMCSA to expand its examinations of newly registered carriers to include new applicants of all types using few or no additional staff resources. Our analysis of FMCSA data found that 1,136 new motor carrier applicants in 2010 had chameleon attributes, of which 1,082 were freight carriers.Even with the large number of new applicant carriers and constraints on its resources, we concluded in 2012 that FMCSA could target the carriers that present the highest risk of becoming chameleon carriers by using a data-driven, risk-based approach. As a result of these findings, we recommended that FMCSA use a data- driven, risk-based approach to target carriers at high risk for becoming chameleon carriers. This would allow expansion of the vetting program to all carriers with chameleon attributes, including freight carriers. FMCSA agreed with our recommendations. In June 2013, to help better identify chameleon carriers, FMCSA developed and began testing a risk-based methodology that implemented a framework that closely follows the methodology we discussed in our report. FMCSA's preliminary analysis of this methodology indicates that it is generally successful in providing a risk-based screening of new applicants, which it plans to use as a front- end screening methodology for all carrier types seeking operating authority. By developing this risk-based methodology and analyzing the initial results, FMCSA has developed an approach that may help keep unsafe carriers off the road. To further help Congress with its oversight of FMCSA and motor carrier safety, we also have on-going work on FMCSA's hours-of-service regulations, DOD's Transportation Protective Services program, and commercial driver's licenses. This work is in various stages, and we expect to issue the final reports later this year. In conclusion, the commercial motor carrier industry is large and dynamic, and FMCSA plays an important role in identifying and removing unsafe carriers from the roadways. With over 500,000 active motor carriers, it is essential to examine ways to better target FMCSA's resources to motor carriers presenting the greatest risk. To effectively do this, FMCSA must use a number of strategies to identify and intervene with high risk carriers. We continue to believe that a data-driven, risk-based approach for identifying high risk carriers holds promise. FMCSA's preliminary steps to implement a risk-based screening methodology have the potential to identify more high risk chameleon carriers. However, without efforts to revise its SMS methodology, FMCSA will not be able to effectively target its intervention resources toward the highest risk carriers and will be challenged to meet its mission of reducing the overall crashes, injuries, and fatalities involving large trucks and buses. Chairwoman Fischer, Ranking Member Booker, and Members of the Subcommittee, this concludes my prepared remarks. I would be pleased to answer any questions you or other Members may have at this time. For further information regarding this statement, please contact Susan Fleming at (202) 512-2834 or [email protected] about this statement. Contact points for our Offices of Congressional Relations and Public Relations can be found on the last page of this statement. Matt Cook, Jen DuBord, Sarah Farkas, Brandon Haller, Matt LaTour, and Amy Rosewarne 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.

FMCSA's primary mission of reducing crashes, injuries, and fatalities involving large trucks and buses is critical to the safety of our nation's highways. However, with more than 500,000 active motor carriers operating on U.S. roadways, FMCSA must screen, identify, and target its resources toward those carriers presenting the greatest risk for crashing in the future. FMCSA has recently taken some steps in this direction by, among other actions: Establishing its oversight program--the CSA program--based on a data-driven approach for identifying motor carriers at risk of presenting a safety hazard or causing a crash, and Establishing a vetting program designed to detect potential "chameleon" carriers--those carriers that have deliberately disguised their identity to evade enforcement actions issued against them. This testimony provides information on both of these programs, based on two recent GAO reports on the oversight challenges FMCSA faces in identifying high risk motor carriers for intervention ( GAO-14-114 ), and chameleon carriers ( GAO-12-364 ), respectively. The Federal Motor Carrier Safety Administration (FMCSA) has taken steps toward better oversight of motor carriers by establishing the Compliance, Safety, Accountability (CSA) and chameleon carrier vetting programs; however, FMCSA could improve its oversight to better target high risk carriers. The CSA program oversees carriers' safety performance through roadside inspections and crash investigations, and issues violations when instances of noncompliance with safety regulations are found. CSA provides FMCSA, state safety authorities, and the industry with valuable information regarding carriers' performance on the road. A key component of CSA--the Safety Measurement System (SMS)--uses carrier performance data collected from inspections and investigations to calculate safety scores for carriers and identify those at high risk of causing a crash. The program then uses these scores to target high risk carriers for enforcement actions, such as warning letters, additional investigations, or fines. However, GAO's 2014 report identified two major challenges that limit the precision of the SMS scores and confidence that these scores are effectively comparing safety performance across carriers. First, SMS uses violations of safety-related regulations to calculate a score, but GAO found that most of these regulations were violated too infrequently to determine whether they were accurate predictors of crash risk. Second, most carriers lacked sufficient data from inspections and violations to ensure that a carrier's SMS score could be reliably compared with scores for other carriers. GAO concluded that these challenges raise questions about whether FMCSA is able to identify and target the carriers at highest risk for crashing in the future. To address these challenges, GAO recommended, among other things, that FMCSA revise the SMS methodology to better account for limitations in available information when drawing comparisons of safety performance across carriers. FMCSA did not concur with GAO's recommendation to revise the SMS methodology because it believed that SMS sufficiently prioritized carriers for intervention. Therefore, FMCSA has not taken any actions. GAO continues to believe that a data-driven, risk-based approach holds promise, and efforts to improve FMCSA's oversight could allow it to more effectively target its resources toward the highest risk carriers, and better meet its mission of reducing the overall crashes, injuries, and fatalities involving motor carriers. GAO's 2012 report found that FMCSA examined only passenger and household goods carriers as part of its chameleon carrier vetting program for new applicants. GAO found that by modifying FMCSA's vetting program, FMCSA could expand its examinations of newly registered carriers to include all types of carriers, including freight carriers, using few additional staff resources. GAO recommended that FMCSA develop, implement, and evaluate the effectiveness of a data-driven, risk-based vetting methodology to target carriers with chameleon attributes. FMCSA concurred with GAO's recommendation and has taken actions to address these recommendations.

Congress established the MHPI in 1996 to provide an alternative funding mechanism to ensure adequate military family housing was available when needed by renovating existing inadequate housing and constructing new homes on and around military bases. The Department of the Army currently has 34 MHPI projects at 44 installations in the United States. Since these projects began, the Army has invested $1.97 billion and the private sector has invested $12.6 billion in the initial development of the military housing projects. In a typical privatized military housing project, the developer is a limited liability company or partnership that has been formed for the purpose of acquiring debt, leasing land, and building and managing a specific project or projects. The limited liability company is typically composed of one or several private-sector members, such as construction firms, real-estate managers, or other entities with expertise in housing construction and renovation. In those cases where a military department has made an investment in the limited liability company, the department may also be a member of the limited liability company. In a typical privatized military housing project, a military department leases land to a developer for a term of 50 years. The military department generally conveys existing homes on the leased land to the developer for the duration of the lease. The developer is responsible for constructing new homes or renovating existing houses and then leasing this housing, giving preference to service members and their families. Although the developers enter into these agreements to construct or renovate military housing, the developer normally enters into various contracts with design builders and subcontractors to carry out the actual construction and renovation. The developer also typically hires a property-management firm to oversee the day-to-day operations of the MHPI project, such as ensuring that maintenance is provided to houses in accordance with the approved budget. According to Army officials, the only litigation that has caused the expenditure of funds not accounted for during the MHPI's annual budget process for operating costs to-date is litigation involving Clark Realty Capital (Clark) and Pinnacle Property Management (Pinnacle). Clark Pinnacle Family Communities oversees some of the highest-profile installations in the Army's MHPI program. The company is a joint venture between Clark, based in the Washington, D.C., area, and Pinnacle, based in Seattle. Starting in 2002, in collaboration with the Army, Clark Pinnacle led the development of four projects in six locations totaling more than 11,000 homes at a value of about $2 billion. The four projects are Presidio of Monterey, and Naval Post Graduate School, California; Fort Irwin, Moffett Federal Airfield, and Parks Reserve Forces Training Fort Benning, Georgia; and Fort Belvoir, Virginia. Although the agreements at the projects vary, generally Clark is the managing partner of the MHPI entities and handled the construction and development. Pinnacle was the property-management firm actually conducting day-to-day property-management activities (e.g., maintenance) at the projects once they were completed. According to Army officials, Clark, through a series of internal audits, determined in 2010 that Pinnacle allegedly was involved in substantial and systemic fraud in the management of the privatized housing at Fort Benning, and ultimately found similar alleged fraud in the management of the privatized housing at Fort Belvoir. As a result, Clark initiated audits of the two California MHPI projects managed by Pinnacle and began to uncover alleged circumstances similar to those at Fort Benning and Fort Belvoir. In 2010, Clark asked the Army for permission to remove Pinnacle as property manager at Fort Benning and Fort Belvoir because of alleged willful misconduct by Pinnacle employees, and for approval to initiate related litigation on behalf of the MHPI entities against Pinnacle; the Army agreed. Subsequent to the initiation of the Fort Belvoir and Fort Benning litigation, Pinnacle attempted to unilaterally amend the terms of the California property-management agreements to make it harder to remove them as property manager. In response, the California MHPI entities then brought suit in California court against Pinnacle seeking a declaratory judgment that the agreements had not been effectively amended by Pinnacle. Pinnacle then filed a cross-suit seeking to uphold the amendments. According to Army officials, the Army wanted Pinnacle removed as the MHPI projects' property manager due to the alleged fraud and mismanagement. Additionally, Army officials stated that they have been motivated by concerns for resident safety because it has been alleged that Pinnacle engaged in falsifying records regarding maintenance and repairs that Pinnacle employees were responsible for performing at all four project locations. An Army official stated that Pinnacle has attempted to obtain information on the amount of funds the MHPI projects have spent on litigation and other litigation strategy-type information, such as documents provided to the Army by Clark, both through discovery and through a Freedom of Information Act request, which the Army (with Department of Justice assistance) successfully denied. According to Army officials, the relevant property-management agreements include a provision that a party who sues under the agreement and substantially prevails is entitled to recoup their legal fees from the losing party. Further, our review found that the MHPI projects' property-management agreements include a provision allowing the substantially prevailing party in litigation brought to enforce or interpret the agreements to be repaid for all court costs and for the reasonable fees and expenses of attorneys and certified public accountants. Because legal fees are potentially recoverable, they are material both to the litigation and to any potential settlement negotiations. In June 2010, Pinnacle was removed as property manager at Fort Benning, and in December 2012 Pinnacle was removed from management at Fort Belvoir. Pinnacle remains property manager at the two California projects pending resolution of the litigation described above. The Army has a standard process to manage MHPI projects' funds for the costs of litigation not accounted for in the MHPI projects' annual budget process, but instead used an alternative process designed to limit access to information about the Pinnacle litigation. The alternative process is consistent with the relevant MHPI projects' operating agreements. The standard process has thresholds governing potential withdrawals or expenditures for Army MHPI project litigation expenses. In the standard process, Army officials generally make major decisions related to MHPI projects, including litigation costs, by following guidance in the Residential Communities Initiative Portfolio and Asset Management Handbook. For example, the Army treats litigation not accounted for in the budget process as a major decision requiring higher-level approval within the Army when costs exceed either 5 to 10 percent of the annual budget or $250,000 over budget. In the standard process, Army officials generally seek approval of such major decisions from either the Office of the Assistant Chief of Staff for Installation Management or the Office of the Assistant Secretary of the Army (Installations, Energy and Environment). The process involves sharing litigation information and estimated costs between the developer and four offices within the Army (MHPI Project Office, Garrison Commander, Office of the Assistant Chief of Staff for Installation Management, and the Office of the Assistant Secretary of the Army ). However, according to Army officials, the standard process has not yet been used to approve any major decisions regarding litigation expenses, because the Pinnacle cases are the only cases that met the major-decision threshold criteria whose litigation expenses have been approved and would have gone through this process had decisions not been made to restrict access to information pertaining to this litigation. Although the Pinnacle cases met the major-decision threshold criteria, according to Army officials, Army officials decided to use an alternative management process to review and approve litigation costs so they could restrict information and confine decision making to a higher organizational level. This process is consistent with the MHPI projects' operating agreements for managing these projects and allows for Clark and only one Army office to review associated cost information. Specifically, these agreements do not specify any internal deliberative process within the Army, but rather only require that Army agreement is obtained for certain major decisions. As a result, the Deputy Assistant Secretary of the Army (Installations, Housing & Partnerships), acting on behalf of the Army, can directly approve specific actions proposed by Clark senior leadership on behalf of the MHPI project, such as approving the litigation and audit budget and expenses. Additionally, Army officials stated that while the standard process was not followed, the alternative process did allow for information regarding the Pinnacle litigation to be periodically coordinated with high-level officials within the Office of the Assistant Chief of Staff for Installation Management. Army officials stated that they wanted to restrict access to the litigation and audit cost estimates because legal fees are potentially recoverable and as a result are material both to the litigation and to any potential settlement negotiations. According to Army officials, throughout the litigation process, Army and Clark officials have regularly shared litigation documents and met to discuss the Pinnacle litigation. After the approval of the MHPI project's annual operating budgets, the Deputy Assistant Secretary of the Army (Installations, Housing & Partnerships) and counsel in the Office of the Army General Counsel reviewed Clark's proposed budget for Pinnacle litigation and audit expenses for that year. Further, the Army and Clark met approximately quarterly with counsel representing the four MHPI projects in the Pinnacle litigation to discuss any significant developments in the cases, specific plans for the next quarter, and general plans for the rest of the year--including any anticipated changes in the legal and audit expenses previously budgeted for. Army officials stated that they also plan to conduct a full review of the costs at the end of the litigation to ensure that all charges by outside counsel were fair and reasonable. According to Army officials and our analysis of the project-management accounts for the four locations involved in the Pinnacle litigation, the expenditure of funds to pay litigation and audit expenses have not prevented the projects from meeting normal operating requirements, such as conducting maintenance or paying for utilities, from the time the litigation began in 2010. Within each MHPI project, the Army receives revenue and distributes the cash flow in a specified order to accounts, such as the revenue account; operating-expenses account; capital, repair, and replacement account; debt-service account; and construction and reinvestment accounts. Figure 1 shows the flow of funding within the Army MHPI projects. Revenue account: The revenue account is funded by servicemember rent, which is typically based on the Basic Allowance for Housing allotments received. This funding is typically disbursed on a monthly basis to pay the budgeted amounts for the operating expense account; capital, repair, and replacement account; and debt-service account. According to Army officials, Pinnacle litigation and audit expenses were also paid from revenues that flowed into the MHPI projects. Operating-expenses account: Each Army MHPI project has an account to pay for all operating expenses including maintenance, utilities, and other administrative costs. According to Army officials, they assist in the development of and approve each MHPI project's annual budget for operating expenses. MHPI project asset managers for the four projects connected to Pinnacle litigation stated that their projects have not had to reduce their operating expenses during the Pinnacle litigation. Furthermore, MHPI project asset managers stated that any increases or decreases in budgeted operating expenses from year to year were due to fluctuations in housing occupancy and changes in utility and maintenance costs and not litigation expenses. Table 1 provides a summary of the four MHPI projects' budgeted operating expenses from calendar years 2009 through 2013. Although Pinnacle litigation and audit expenses were not incurred until 2010, this table shows budgeted operating expenses for 2009 to provide a comparison of expenses prior to the start of litigation. Capital, repair, and replacement account: This account includes funds for repair and replacement of older components of homes and community facilities. The Army requested an audit of the projects' financial data from January 2009 through June 2012 and the audit results showed that no maintenance was deferred during this period. Debt-service account: This account is used to pay the outstanding debt for the MHPI project. Based on our review of MHPI project account data, we found that all four MHPI projects have little or no balance in this account because debt is paid off throughout the year. Construction account and Reinvestment account: Construction Account--Before the start of an MHPI project, a plan is developed for construction, and needed funding levels are determined. This plan is reviewed annually based on actual and estimated costs to determine if any changes are needed to the development scope of the project. This account is used to pay for the initial development and construction of the MHPI project, which according to Army officials generally lasts during the first 7 to 10 years of project operations. As discussed earlier, the revenue account funds the budgeted amounts for the operating expense account; the capital, repair, and replacement account; and the debt-service account, and any funding not needed for these purposes flows to the construction account. However, because litigation expenses were also paid from the revenue account, officials stated that additional funding has not transferred into the construction account as otherwise would likely have occurred. Nevertheless, Army officials said that the Pinnacle litigation and audit costs have had no effects on the projects' ability to move forward with construction as planned because these projects were developed within anticipated funding levels. According to Army officials, currently all four of the projects are nearing the end or have recently completed the initial development period, and after the development and approval of a 5-year future plan, the construction account will be closed. Reinvestment Account--According to Army officials, any funds remaining in the construction accounts when the projects reach the end of their initial development and construction phase are moved to the reinvestment account. This account is also used to hold the MHPI projects' excess cash flow that is not required after payment of the operating expenses, debt service, and other payments. Funds start to accumulate in the reinvestment account for future use in renovation or replacement of homes after the initial development and construction of the project ends. Since all four of the projects are still in or have recently completed this initial development phase--and based on our review of MHPI project account data--no funds have accumulated in the reinvestment accounts as of February 2014. Due to the MHPI projects' incurring litigation and audit expenses, less funding will ultimately be available to transition from the MHPI projects' construction account to the reinvestment account unless litigation concludes prior to the transition, and funds are recouped assuming the projects prevail in the litigation with Pinnacle. The MHPI projects' property-management agreements provide that the party that substantially prevails in a legal action may recoup their legal expenses. Army officials stated that they expect the MHPI projects to prevail in the litigation and recoup most, or even all, the costs of conducting the litigation. This report does not include any recommendations. We provided a draft of this report to DOD for comment. However, DOD did not provide written comments and provided technical comments, which we incorporated in our report as appropriate. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Secretary of the Army; and the Director, Office of Management and Budget. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4523 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix I. In addition to the contact named above, Laura Durland (Assistant Director), Chanee Gaskin, Stephanie Moriarty, Carol Petersen, Richard Powelson, Amie Steele, John Van Schaik, and Michael Willems made key contributions to this report.

In 1996, Congress enacted the MHPI, which provided the Department of Defense with a variety of authorities that may be used to obtain private-sector financing and management to repair, renovate, construct, and operate military family housing. The Army has invested $1.97 billion and the private sector has invested $12.6 billion in the initial development of MHPI projects at 44 installations. The Senate report accompanying a proposed version of the National Defense Authorization Act for Fiscal Year 2014 mandated GAO to examine the Army's litigation costs related to MHPI, specifically any litigation costs not accounted for during the MHPI's annual budget process. This report examines the extent to which the Army has implemented its process to manage funds for litigation not accounted for in the budget and identifies any effects that the litigation and audit costs have had on managing the MHPI projects. To conduct its work, GAO examined the Army's process for managing litigation, interviewed Army officials, and analyzed documents to determine whether litigation and audit costs have had any effects on managing the MHPI projects. GAO is not making recommendations in this report. DOD provided technical comments on a draft of this report, which were incorporated as appropriate. The Army has a standard process to manage litigation costs of its Military Housing Privatization Initiative (MHPI) projects that are not accounted for in the annual budget process. Army officials indicated that there is one case between four Army MHPI projects and Pinnacle Property Management (Pinnacle) that met the dollar threshold criteria and that would have been approved through this process. However, Army officials did not use the standard process because the Army determined that it needed to limit access to Pinnacle litigation information to avoid disclosing any information material to the litigation strategy. As a result, the Army used an alternative process to review and approve litigation costs for Pinnacle that is consistent with MHPI operating agreements. Had the standard process been followed, litigation and litigation cost information would have been shared with the MHPI projects construction company, Clark Realty Capital (Clark), and four different offices within the Army. Army and Clark officials decided to use the alternative process allowed by the MHPI's operating agreements so that fewer personnel would be aware of ongoing litigation information involving Pinnacle. The alternative process allows the Army and Clark to directly approve specific actions on behalf of the MHPI project, such as approving litigation and audit expenses, and allows sharing information with only Clark and one Army office. According to Army officials and our analysis of these four MHPI projects' accounts, Pinnacle litigation expenses have not prevented the projects from meeting their normal operating requirements, such as conducting maintenance or paying for utilities. Rents collected from these four MHPI projects funded the normal operating requirements for these projects as well as the Pinnacle litigation and audit expenses. Rents collected in excess of operating expenses normally are available for other purposes such as construction; capital, repair, and replacement of buildings; and future reinvestment. However, because litigation expenses were also paid from the rents collected at the four MHPI projects involved in the litigation, some funds have not been available for these purposes. Nevertheless, Army officials said that the Pinnacle litigation and audit costs have had no effects on the four projects' ability to move forward with construction as planned so far or to meet any scheduled capital repair projects because these projects were developed within anticipated funding levels. The Army property-management agreements provide that the party that substantially prevails in a legal action may recoup their legal expenses. Army officials stated that they expect the MHPI projects to prevail in the litigation and recoup most, or even all, the costs of conducting the litigation.

Other transaction authority was created to enhance the government's ability to acquire cutting-edge science and technology in part through attracting contractors that typically have not pursued government contracts because of the cost and impact of complying with government procurement requirements. Because other transactions are exempt from certain statutes, they permit considerable latitude by agencies and contractors in negotiating agreement terms. For example, other transactions allow the federal government flexibility in negotiating intellectual property and data rights, which generally stipulate each party's rights to technology developed under the agreement. Because these agreements do not have a standard structure based on regulatory guidelines, they can be challenging to create and administer. The Homeland Security Act of 2002 authorizes two types of other transactions: (1) prototype and (2) research and development. Other transactions for prototypes are used to carry out projects to develop prototypes used to evaluate the technical or manufacturing feasibility of a particular technology, process, or system. To use other transactions for prototypes, federal statute requires that one of three conditions be met: (1) significant participation by a nontraditional contractor, (2) parties to the transaction other than the federal government will pay at least one- third of the total project cost, or (3) the Chief Procurement Officer determines that exceptional circumstances justify the use of an other transaction agreement. Other transactions for research and development are used to perform basic, applied, or advanced research and do not require the involvement of nontraditional contractors. Almost all of S&T's other transaction agreements have been for prototype projects and justified based on the involvement of nontraditional contractors. From fiscal years 2004 through 2008, S&T entered into at least 55 other transaction agreements to support 17 different projects. (For a description of the projects see app. II.) DHS entered into 45 agreements in fiscal years 2004 and 2005, when it first began using other transactions to support prototype development projects, based on the Department of Defense's (DOD) guidance and, in some cases, with assistance from DOD contracting officers. Currently, DHS's Office of Procurement Operations provides all contracting support, including that for other transactions, to S&T. S&T contracting officers explained that they have been more selective in choosing to use other transaction agreements in recent years. Since 2006, DHS has entered into fewer new agreements each year, while continuing to fund work under the initial agreements entered into in 2004 and 2005. (See fig. 1.) As of April 2008, according to DHS data, 21 agreements were active--including 1 agreement entered into in fiscal year 2008--and 33 agreements were closed. In fiscal year 2007, other transactions accounted for about $124 million (about 17 percent) of the S&T's total acquisition activity of $748 million to fund and develop technology in support of homeland security missions. A small proportion of projects account for the vast majority of the funding for other transactions; in February 2008, we reported that the seven largest agreements accounted for over three-quarters of all obligations. DHS has used its other transaction authority to leverage the capabilities of nontraditional contractors in prototyping and research and development efforts. Most of S&T's agreements have involved nontraditional contractors, including small businesses, at the prime or subcontractor level. The majority of the nontraditional contractors provided technologies or services that DHS described as significant to the efforts under S&T projects. S&T program managers stated that without the involvement of nontraditional contractors, some of the research efforts may not have been able to advance. We identified a total of 50 nontraditional contractors who participated in 44 (83 percent) of the agreements we examined, with multiple nontraditional contractors involved on 8 agreements. Half of these contractors had not recently worked for the government. Sixteen nontraditional contractors were prime contractors on agreements, while the other 34 were subcontractors. Nearly half of the nontraditional contractors were classified as small businesses. According to some S&T program managers, using the agreements reduced the administrative burden of working with the federal government and encouraged small businesses, in particular, to participate. Figure 2 shows the proportion of prime contractors and subcontractors by business size. Small business, subcontractor (12) Large business, subcontractor (12) Large business, prime contractor (5) Planned obligations for 25 of the 44 agreements involving nontraditional contractors total $117 million, which is 40 percent of the total dollars obligated through these agreements. In describing the roles of the nontraditional contractors, the agreements and supporting documentation we reviewed identified the majority of these roles as significant to the project's successful completion. Program staff, contracting officers, and contractor representatives also highlighted several technologies and services that nontraditional contractors provided to S&T through the use of other transaction authority. Several agreements that we reviewed identified significant technologies and services provided by nontraditional contractors. For example, one agreement with a nontraditional contractor--the sole participant on the project--noted that the contractor's sensor technology would be used to develop prototypes designed to detect chemical warfare agents. The agreement stated that the resulting prototype would help first responders assess and monitor the risks in an area after a suspected or known chemical attack. Similarly, one nontraditional subcontractor was involved under an agreement to develop a prototype for delivering robust detection and geographic information about bioterror attacks. The agreement stated this subcontractor would have a significant level of participation and a substantial role in the project, and possessed unique skills and expertise in the area of DNA microarrays, which was identified as a core technology for the system. In addition, the subcontractor was identified as the leader for all bioagent detection laboratory testing for the project, as well as for designing and performing the lab tests for all critical items in the development of the system. Program managers said some of the projects pursued under the agreements could not have advanced without the contributions of nontraditional contractors. For example, S&T staff told us that one project, the development and testing of a prototype device to counter the threat of shoulder-fired missiles to commercial aircraft, required the participation of nontraditional contractors. They said that the involvement of major commercial airlines and transport companies allowed S&T to test whether a certain military technology was suitable for a commercial application. In another case, the project manager said that the nontraditional contractor was the only company that held patent rights for the unique technology needed to develop a type of foot and mouth disease vaccine. According to the nontraditional contractor's representative, the company would not have participated in the project under a FAR-based contract due to concerns about retaining intellectual property rights. The proportion of dollars obligated on each agreement for nontraditional contractors--which ranged from less than 1 percent to 100 percent--did not necessarily indicate the importance of the contractors' contributions. For example, only 1 percent of one agreement's obligations was allocated for work by a nontraditional subcontractor to develop chemical tests for a hazardous substance detection system. However, the prime contractor told us that this nontraditional contractor was the leading expert in the field and uniquely qualified to contribute to the project. In a similar example, only 3 percent of an agreement's obligations were allocated for work by a nontraditional contractor to manufacture devices necessary for a mobile laboratory prototype. However, DHS considered these devices the heart of the project, and thus a significant contribution. Since we reported in 2004, DHS has continued to develop policies and practices for managing other transactions, issuing an operating procedure and a guidebook in May 2008, but has not fully addressed the need to assess its use of these agreements and maintain a contracting workforce. DHS has developed guidance and practices to minimize financial and program risks. However, DHS does not have information to systematically assess whether it is obtaining the full benefits of its other transaction authority. Finally, contracting officers with business acumen and training are critical to entering into and administering other transactions; however, it is unclear whether the present workforce is sufficient to support S&T's operation. In 2004, we reviewed DHS policies and procedures and found they provided a foundation for using its other transaction authority, though refinements were needed. We reported that since the beginning of its use of other transactions, DHS has applied commonly accepted acquisition practices, such as using contractor payable milestone evaluations to manage other transaction agreements. Aspects of DHS's review process for other transaction agreements are similar to those for contracts subject to the FAR. For example, DHS's proposed sole source agreements must be explained and approved, and program and contracting offices, as well as its office of general counsel, review all proposed agreements. DHS's guidance for prototype projects also encourages the use of fixed price agreements with fixed payable milestones to minimize financial and performance risks. We found that DHS has established fixed price agreements with fixed payable milestones in 44 of the 53 agreements we reviewed. Fixed price acquisitions generally transfer most of the financial risk to the contractor. The financial risk for both parties may be further limited in other transaction agreements by a provision that allows either the government or contractor to leave the program without penalty. In addition, the use of fixed price agreements mitigates concerns regarding cost controls, as the costs are fixed at the time the agreements are established. Payable milestones mark observable technical achievements or events that assist program management and focus on the end goal of the agreement. DHS guidance states that it is based on commercial best practices, in which the use of payable milestones gives industry opportunities to provide major input into milestone descriptions as well as the option to leave the program. One S&T program manager told us that a contractor opted to cancel an agreement at a payable milestone after determining it could no longer meet the goals of the program. DHS's recent guidance also calls for considering when to include financial audit provisions in the agreements. Our 2004 report noted that the department lacked guidance on when to include such provisions--other than providing for access to GAO when the agreement is over $5 million. In May 2008, DHS issued a guidebook for the use of other transactions for prototypes, which now includes additional information on when audits should be conducted. Specifically, it states that audit provisions should be included when the payment amounts in the agreement are based on the awardee's financial or cost records, or when parties other than the government are required to provide at least one-third of the total costs. The guidebook contains sample audit clauses that contracting officers should use or tailor to an individual agreement. The guidance also describes when these requirements apply to key participants other than the prime contractor. Two key benefits of using other transactions are to provide greater latitude in negotiating the allocation of intellectual property and data rights and to leverage the cutting-edge technology developed by nontraditional contractors. Knowledge gained from past projects supported by other transaction agreements could allow DHS to assess the extent to which these benefits are being obtained and inform planning to maximize benefits for future projects. Performance information can help agency managers to ensure that programs meet intended goals, assess the efficiency of processes, and promote continuous improvement. We have previously reported on the benefits of agencies using systematic methods to collect, verify, store, and disseminate information on acquisitions for use by their current and future employees. However, DHS does not have the data it needs to make such assessments and ensure that, in using other transactions, the benefits outweigh the additional risks. In our 2004 review, we found that S&T lacked the capacity to systematically assess its other transactions, and we recommended that DHS capture knowledge obtained during the acquisition process to facilitate planning and implementing future projects. While the S&T directorate now shares knowledge about the benefits derived from completed projects on an informal basis, DHS does not formally collect or share information about whether other transactions have been successful in supporting projects or what factors led to success or failure. In 2005, DHS hired a consultant to develop a "lessons learned" document based on the DOD's experience using other transactions, and DHS has incorporated this into its other transactions training. S&T program representatives told us that their programs undergo regular management reviews; however, these reviews are not documented. DHS has not developed a system for capturing knowledge from its own projects, which may limit its ability to learn from experience and adapt approaches going forward. DHS also lacks the information needed to assess whether it is using other transaction authority to effectively negotiate intellectual property and data rights. While some agreements tailored the language on intellectual property and data rights to the particular needs of the project, we found that the language in most agreements was similar and that some of this language is generally applied to FAR-based contracts. For example, most agreements included standard FAR clauses for allocating intellectual property rights, such as giving all ownership of an invention to the contractor while maintaining a paid-up license that allows the government to use the invention; standard FAR language that gives the government the right to require a contractor to grant a license to responsible applicants or grant the license itself if the contractor refuses to do so; requirements for the contractor to submit a final report on the use of the inventions or on efforts at obtaining such use; and a standard data rights clause with an added provision that extends rights to state and local governments. Incorporating these clauses enables DHS to protect the government's interest, however, the extent to which DHS needed these rights is unclear because the rationale for using these provisions and the anticipated benefits were not documented. Concerned that rights may be overestimated--and ultimately result in the government paying for unused rights and discouraging new businesses from entering into other transaction agreements--DOD issued guidance on intellectual property rights negotiations. We reported that DOD's guidance called for consideration of factors such as the costs associated with the inability to obtain competition for future production, maintenance, upgrade, and modification of prototype technology, or the inability of the government to adapt the developed technology for use outside the initial scope of the prototype project. DHS's May 2008 guidance for prototype projects includes similar areas of consideration to assist contracting officers in negotiating these rights, which could help to address this concern if implemented as intended. This guidance also provides that contracting officers, in conjunction with program managers, should obtain the assistance of the DHS Intellectual Property Counsel in assessing intellectual property needs. To better track procurement data from other transaction agreements, DHS has modified its procurement database to capture additional information. For example, DHS recently made changes to its database to allow the user, in part, to identify a prime contractor's nontraditional status. However, the capacity of the database is limited as it is not designed to capture data to assess DHS's use of other transactions--particularly on the extent of nontraditional contractors' contributions. The procurement database is also limited to including information on new and active agreements, so DHS may have missed an opportunity to gather data on experiences from any inactive agreements not included in the database. As of April 2008, at least 10 agreements--almost 20 percent of all the agreements we reviewed--were not in the database. In addition, the database does not contain information on the nature of the work performed by nontraditional contractors--either prime or subcontractors--or the funding allocated to nontraditional contractors. DHS's guidance only recommends reporting expenditures of government funds if a cost reimbursement agreement is involved or the agreement involves cost- sharing. Most available data on the contributions of nontraditional contractors are maintained in hard copy files, but documentation on 19 of 44 agreements did not contain sufficient information for us to determine the planned obligations for nontraditional contractors. The unique nature of other transaction agreements requires staff with experience in planning and conducting research and development acquisitions, strong business acumen, and sound judgment to enable them to operate in a relatively unstructured business environment. DHS requires its other transaction contracting officers to hold a certification for the most sophisticated and complex contracting activities and to take training on the use of this authority. DHS has created training courses that provide instruction in the use of both FAR-based research and development contracting and other transaction agreements. The topics covered include intellectual property, foreign access to technology created under other transactions, and program solicitations. According to DHS representatives, between January 2005 and March 2008, approximately 80 contracting staff, including contracting officers, had been trained. DHS representatives also said they are developing a refresher course for staff who have already completed the initial training. DHS's recently issued guidance also requires program staff to take training on other transactions. When DHS first began entering into other transaction agreements in fiscal year 2004, it relied upon contracting services from other agencies, such as the U.S. Army Medical Research Acquisition Activity, including staff who were experienced in executing other transaction agreements. Since fiscal year 2005, DHS has been granting warrants to permit its own contracting officers to enter into other transaction agreements and has issued these warrants to 17 contracting officers. Nine of these contracting officers have been assigned to support S&T; however, DHS has experienced turnover and 4 of these S&T contracting officers have left DHS since February 2008. The Office of Procurement Operations does not have a staffing model to estimate how many contracting officers are needed to support S&T's workload on an ongoing basis. Two S&T program managers, who each manage one agreement, told us that they had difficultly obtaining assistance from the procurement office for other transactions, and attributed this to inadequate staffing levels and turnover. Our prior work has noted ongoing concerns with regard to the sufficiency of DHS's acquisition workforce to ensure successful outcomes. In 2003, we recommended that DHS develop a data-driven assessment of the department's acquisition personnel resulting in a workforce plan that would identify the number, skills, location, and competencies of the workforce. In 2005, we reported on disparities in the staffing levels and workload imbalances among component procurement offices and recommended that DHS conduct a departmentwide assessment of the number of contracting staff. This recommendation has not been implemented. As of February 2008, DHS reported that approximately 61 percent of the minimum required level and 38 percent of the optimal level of contract specialists were in place, departmentwide. We have ongoing work on acquisition workforce issues and initiatives at DHS and plan to report on the results of these efforts in the final product for that engagement. While other transaction agreements can carry the benefit of tapping into innovative homeland security technologies through nontraditional contractors, as they are exempt from federal procurement regulations, they also carry the risk of reduced accountability and transparency if not properly managed. DHS has successfully used its other transaction authority to attract nontraditional contractors to develop innovative technologies to address homeland security needs, and it continues to implement the policies and procedures needed to manage the inherent risks of these agreements. However, DHS continues to lack the resources--in terms of knowledge and workforce capacity--to ensure that its agreements are transparent and maximize their potential benefits. If other transaction authority is made permanent, it will be important for DHS to take a systematic approach to assessing its experience with other transaction authority and identifying and addressing contracting workforce needs. These steps would not only enable DHS to more strategically manage its agreements in the future, they also would provide Congress with useful information on the benefits of the authority. To promote the efficient and effective use by DHS of its other transactions authority to meet its mission needs, we recommend that the Secretary of Homeland Security direct the Under Secretary for Management and the Under Secretary for Science and Technology to take the following two actions: Collect relevant data on other transaction agreements, including the roles of and funding to nontraditional contractors and intellectual property rights, and systematically assess and report to Congress on the use of these agreements to ensure that the intended benefits of the authority are achieved. Direct the Office of Procurement Operations to work with the Science and Technology directorate to determine the number of contracting officers needed to help ensure a sufficient contracting workforce to execute other transaction authority. We provided a draft of this report to DHS for review and comment. In written comments, DHS concurred with our recommendations and provided some information on efforts under way to improve information on its use of other transaction authority. DHS's comments are reprinted in their entirety in appendix III. DHS also provided technical comments that were incorporated where appropriate. In response to our first recommendation, that DHS collect relevant data on other transactions agreements, including the roles of and funding to nontraditional contractors and intellectual property rights, and systematically assess and report to Congress on the use of these agreements to ensure that the intended benefits of the authority are achieved, DHS stated that the Chief Procurement Officer is taking steps to improve the information DHS has on its other transactions. DHS reiterated changes it has made to its procurement data system which are described in our report. DHS also noted the information included in its annual report to Congress on S&T's other transactions. For example, the report details the technical objectives of each other transaction including the technology areas in which the project is conducted. DHS also stated that it plans to revise its guidance to specify that the Office of Procurement Operations and S&T program management should formally collaborate in preparing its annual report to Congress, noting that this process can serve as a means of sharing "lessons learned" on the benefits of other transaction authority. While DHS stated that its report to Congress includes overarching assessment information, DHS does not systematically evaluate whether it is obtaining the full benefits of other transaction authority. For example, DHS did not specify how it will improve the availability of and systematically assess information related to the nature of the work being performed by nontraditional contractors, the funding allocated to nontraditional contractors, or areas considered in the negotiation of intellectual property rights. We continue to believe that these are key areas in which DHS should collect and evaluate data to determine whether the intended benefits of the authority are achieved. In response to our second recommendation, that the Office of Procurement Operations work with S&T to determine the number of contracting officers needed to help ensure a sufficient contracting workforce to execute other transaction authority, DHS stated that this issue can only be addressed as part of broader departmentwide acquisition workforce initiatives. DHS recognized the need to have contracting personnel, certified in the use of other transactions, in sufficient numbers to handle S&T's workload as it arises, but noted that the workload does not lend itself to a static number of personnel. While we recognize that the workload for other transactions fluctuates, the Office of Procurement Operations does not have a staffing model that incorporates workload to estimate what level of contracting support is needed for other transactions on an ongoing basis. We continue to believe that this would help DHS managers ensure a sufficient contracting workforce to execute S&T's other transaction authority. We are sending copies of this report to interested congressional committees and the Secretary of Homeland Security. 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. If you or your staff have questions regarding this report or need additional information, please contact me at (202) 512-4841 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Principal contributors to this report were Amelia Shachoy, Assistant Director; Alexandra Dew; Russ Reiter; Matthew Voit; Tracey Graham; John Krump; and Karen Sloan. To determine the extent to which nontraditional contractors have been involved in other transactions with the Department of Homeland Security (DHS) to fulfill technology and mission needs, we obtained an initial list of agreements from DHS's Office of Procurement Operations, the contracting office responsible for entering into these agreements; conducted a file review; and interviewed DHS's Science and Technology (S&T) directorate's program managers. As shown in table 1, we identified 53 of 55 agreements that we could review. Nontraditional contractors were identified in 44 agreement files, although not all had complete information. For example, 19 of these files did not include sufficient information to determine how much of the contract value was proposed to go to nontraditional contractors. We analyzed all available agreements and the contractors' proposals to identify the nontraditional contractors, the contribution they plan to bring to the project, and the nontraditional contractors' shares as identified in contractors' proposals. However, DHS relies on contractors to self-certify their status as a nontraditional government contractor during agreement negotiation. In analyzing DHS's agreements, we did not independently verify a contractor's reported status as a nontraditional contractor other than to conduct a search of the Federal Procurement Data System-Next Generation (FPDS-NG) to determine whether these contractors had prior government work. Our limited review of FPDS-NG identified 25 contractors who had worked with the government in the previous year but found no contract actions that appeared to be subject to the cost accounting standards or that were for prototype or research projects in excess of $500,000. We also did not independently verify the share of costs allocated to nontraditional contractors or their contributions under the agreements. We determined nontraditional contractors' business size by reviewing data from the Central Contractor Registration. With these data, we identified the business size of 39 of 50 nontraditional contractors. Of the remaining 11 firms, 1 firm did not have a business size identified and 10 were not listed in the database. In addition, we interviewed DHS contracting officers and S&T program managers to obtain their views on the contributions that the nontraditional contractors provided to the project. In addition, we also interviewed two prime contractors, one traditional and one nontraditional, to understand their experiences with entering into other transactions with DHS. To assess DHS's management of the acquisition process when using other transactions, we reviewed and analyzed each available agreement file to assess the process and procedures used to negotiate and enter into the agreement. We reviewed DHS's Management Directive 0771.1, Other Transaction Authority, dated July 8, 2005, and Procurement Operating Procedure 311, Other Transactions for Prototypes and the attached Other Transaction for Prototype Guidebook, dated May 22, 2008. We also interviewed contracting officers and program managers as well as a representative from DHS's legal counsel to obtain an understanding of the review process. We reviewed each available agreement analysis to determine how the intellectual property and data rights were negotiated. We discussed with contracting and program representatives whether information is collected to assess the effectiveness and benefits of the use of other transaction authority or what lessons are learned from its use. We also reviewed DHS's June 30, 2008, report to Congress on its use of other transaction authority, which includes information on 38 agreements. During the course of our audit work, we reviewed 15 additional agreements, including 1 agreement entered into after DHS's reporting period. We reviewed DHS's training material provided to contracting officers on the use of the other transaction authority. We also obtained information on the number of contracting representatives that have received this training and the number of those that have left DHS since 2005. We also reviewed our prior reports on the use of other transaction authority at the Departments of Defense and Homeland Security. We conducted this performance audit from April through September 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Autonomous Rapid Facility Chemical Agent Monitor (ARFCAM) BioAgent Autonomous Network Detector (BAND) Food Biological Agent Detection Sensor (FBADS) Instantaneous Bio-Aerosol Detection Systems (IBADS) Lightweight Autonomous Chemical Identification System (LACIS) Hand-held chemical agent detectors Low-Cost Bio-Aerosol Detection System (LBADS) Portable High-through-put Integrated Laboratory Identification System (PHILIS) Rapid Automated Biological Identification System (RABIS) Counter Man-Portable Air Defense Systems (CMANPADS) S&T Infrastructure Protection & Geophysical Science Division Kentucky Critical Infrastructure Protection Institute (KCI) S&T Homeland Security Advanced Research Projects Agency Prototypes and Technology for Improvised Explosives Device Detection (PTIEDD)

When the Department of Homeland Security (DHS) was created in 2002, it was granted "other transaction" authority--a special authority used to meet mission needs. While the authority provides greater flexibility to attract and work with nontraditional contractors to research, develop, and test innovative technologies, other transactions carry the risk of reduced accountability and transparency--in part because they are exempt from certain federal acquisition regulations and cost accounting standards. In 2004, GAO reported on DHS's early use of this authority. This follow-up report determines the extent to which nontraditional contractors have been involved in DHS's other transactions, and assesses DHS's management of the acquisition process when using this authority to identify additional safeguards. To conduct its work, GAO reviewed relevant statutes, guidance, and prior GAO reports on other transactions, and interviewed contracting and program management officials, as well as contractors. GAO also reviewed 53 files for agreements entered into from fiscal years 2004 through 2008 and identified those involving nontraditional contractors. DHS's other transactions documentation indicates that nontraditional contractors played a significant role in over 80 percent of the Science and Technology directorate's other transaction agreements. GAO identified 50 nontraditional contractors who participated in 44 agreements--one-third of them were prime contractors and about half of them were small businesses. These contractors provided a variety of technologies and services that DHS described as critical--including technology designed to detect chemical warfare agents after a suspected or known chemical attack. The proportion of dollars obligated for nontraditional contractors on an agreement did not necessarily indicate the importance of their contributions. For example, only 1 percent of total agreement obligations were allocated to a nontraditional subcontractor that, according to the prime contractor, was specially qualified for developing tests for a hazardous substance detection system. While DHS has continued to develop policies and procedures for other transactions, including some to mitigate financial and program risks for prototype projects, the department faces challenges in systematically assessing its use of other transactions and maintaining a skilled contracting workforce. DHS issued guidance in 2008 and continued to provide training to contracting staff on the use of other transactions. However, DHS does not track information on the amount of funds paid to nontraditional contractors or the nature of the work they performed, which could help the department assess whether it is obtaining the full benefits of other transaction authority. DHS recently updated its procurement database to capture information on other transaction agreements, but the database does not include all of the data DHS would need to assess nontraditional contractor involvement. Further, DHS's ability to maintain a stable and capable contracting workforce remains uncertain due to high staff turnover and the lack of a staff planning method.

Senior executives in the successful organizations we studied were personally committed to improving the management of technology. The PRA and the Clinger-Cohen Act make federal agency heads directly responsible for establishing goals and measuring progress in improving the use of information technology to enhance the productivity and efficiency of their agency's operations. To help them with their major information management responsibilities, the reform legislation directs the heads of the major agencies to appoint CIOs. The legislation assigns a wide range of duties and responsibilities to CIOs, foremost of which are working with the agency head and senior program managers to implement effective information management to achieve the agency's strategic goals; helping to establish a sound investment review process to select, control, and evaluate spending for information technology; promoting improvements to the work processes used by the agency to carry out its programs; increasing the value of the agency's information resources by implementing an integrated agencywide technology architecture; and strengthening the agency's knowledge, skills, and capabilities to effectively manage information resources, deal with emerging technology issues, and develop needed systems. While there are various approaches on how best to use the CIO position to accomplish these duties, the legislative requirements, OMB guidance, and our best practices experience with leading organizations define common tenets for the CIO position. An agency should place its CIO at a senior management level, working as a partner with other senior officials in decision-making on information management issues. Specifically, agencies should appoint a CIO with expertise and practical experience in technology position the CIO as a senior partner reporting directly to the agency head; ensure that the CIO's primary responsibilities are for information have the CIO serve as a bridge between top management, line management, and information management support professionals, working with them to ensure the effective acquisition and management of the information resources needed to support agency programs and missions; task the CIO with developing strategies and specific plans for the hiring, training, and professional development of staff in order to build the agency's capability to develop and manage its information resources; and support the CIO position with an effective CIO organization and management framework for implementing agencywide information technology initiatives. Having effective CIOs will make a real difference in building the institutional capacity and structure needed to implement the management practices embodied in the broad set of reforms set out in the PRA and the Clinger-Cohen Act. The CIO must combine a number of strengths, including leadership ability, technical skills, an understanding of business operations, and good communications and negotiation skills. For this reason, finding an effective CIO can be a difficult task. Agencies faced a similar difficulty in trying to find qualified chief financial officers to implement the CFO Act's financial management reforms. It took time and concerted effort by the Administration, the CFO Council, and the Congress to get strong, capable leaders into the CFO positions. Shortly after the Clinger-Cohen Act went into effect, OMB evaluated the status of CIO appointments at the 27 agencies. OMB noted that at several agencies, the CIO's duties, qualifications, and placement met the requirements of the Clinger-Cohen Act. According to OMB, these CIOs had experience, both operationally and technically, in leveraging the use of information technology, capital planning, setting and monitoring performance measures, and establishing service levels with technology users. These CIOs also had exposure to a broad range of technologies, as well as knowledge of government budgeting and procurement processes and information management laws, regulations, and policies. However, OMB had concerns about a number of other agencies that had acting CIOs, CIOs whose qualifications did not appear to meet the requirements of the Clinger-Cohen Act, and/or CIOs who did not report directly to the head of the agency. OMB also raised concerns about agencies where the CIOs had other major management responsibilities or where it was unclear whether the CIOs' primary duty was the information resource management function. OMB stated that it would reevaluate the situations at these agencies at a later date, after agencies had time to put permanent CIOs in place or take corrective actions to have their CIO appointment and organizational alignment meet the necessary requirements. OMB called for updated information on the status of governmentwide CIO appointments in its April 1997 data request on individual agency efforts to implement provisions of the Clinger-Cohen Act. OMB has not yet issued a status report based on this information and subsequent follow-up. In a recent discussion, OMB officials stated that they will provide feedback on individual CIO appointments as part of the fiscal year 1999 budget review process. On the basis of preliminary observations, however, OMB officials stated that they still have some of the same concerns that they had a year ago about CIO positions that have not been filled, have not been properly positioned, or have multiple responsibilities. It is very important for OMB to follow through on its efforts to assess CIO appointments and resolve outstanding issues. Information technology reforms simply will not work without effective CIO leadership in place. We will continue to monitor this situation to provide our suggestions on actions that need to be taken. One area that we will focus on during the coming year is CIOs who have major responsibilities in addition to information management. The Clinger-Cohen Act clearly calls for CIOs to have information resources management as their primary duty. We have stressed the importance of this principle in testimonies and, most recently, in our February 1997 high-risk report, in which we emphasized that the CIO's duties should focus sharply on strategic information management issues and not include other major responsibilities. In addition to the escalating demands of rapidly evolving technologies, CIOs are faced with many serious information management issues, any one of which would be a formidable task to address. Taken together, these issues create a daunting body of work for any full-time CIO, much less for one whose time and attention is divided by other responsibilities. As you know, Mr. Chairman, we have reported extensively on a number of these compelling challenges. The following are just a few of these challenges. Ensuring that federal operations will not be disrupted by the Year 2000 problem is one of the foremost and most pressing issues facing agencies--one that we have designated as a governmentwide high-risk area. Efforts by this Subcommittee have underscored repeatedly that many agencies are seriously behind schedule in resolving this problem during the next 2 years. Poor security management is putting billions of dollars worth of assets at risk of loss and vast amounts of sensitive data at risk of unauthorized disclosure, making it another of our governmentwide high-risk areas. Agencies need to make much better progress in designing and implementing security programs and getting skilled staff in place to manage them. This extreme vulnerability has been given added emphasis by the recent Presidential commission report on the growing exposure of U.S. computer networks to exploitation and terrorism. Agencies need to develop, maintain, and facilitate integrated systems architectures to guide their system development efforts. We have seen major modernization efforts handicapped by incomplete architectures, such as at the Federal Aviation Administration (FAA) and the Internal Revenue Service (IRS), as well as the departments of Veterans Affairs and Education. Agencies need to establish sound information management investment review processes that provide top executives with a systematic, data-driven means to select and control how technology funds are spent. Our reviews of system development and modernization projects, such as the Medicare Transaction System and the four high-risk efforts included in our 1997 High-Risk Series, continue to show the crucial importance of structured investment oversight.In our 1997 High-Risk Series we identified 25 high-risk areas covering a wide array of key federal activities, ranging from Medicare fraud to financial management at the Department of Defense. Resolving the problems in these areas depends heavily on improved information management. Agencies need to integrate strategic information planning with the overall strategic plan that they must prepare under the Results Act. Our review of recent attempts by agencies to develop sound strategic plans showed very weak linkages between the strategic goals and the information technology needed to support those goals. Agencies must build their staffs' skills and capabilities to react to the rapid developments in information technology, develop needed systems, and oversee the work of systems contractors. Weaknesses in agencies' technology skills bases, especially in the area of software acquisition and development, have been a recurring theme in our reviews of federal information technology projects. Despite the urgent need to deal with these major challenges, we still see many instances of CIOs who have responsibilities beyond information management. At present, only 12 agencies have CIOs whose responsibilities are focused solely on information management. The other 15 agencies have CIOs with multiple responsibilities. Together, these 15 agencies account for about $19 billion of the nearly $27 billion dollars in annual federal planned obligations for information technology. While some of these CIO's additional responsibilities are minor, in many cases they include major duties, such as financial operations, human resources, procurement, and grants management. At the Department of Defense, for example, the CIO is also the Assistant Secretary for Command, Control, Communications and Intelligence. By asking the CIO to also shoulder a heavy load of programmatic responsibility, it is extremely difficult, if not impossible, for the CIO to devote full attention to information resource management issues. Recognizing this problem, the Department's Task Force on Defense Reform is examining the current structure of the CIO position to ensure that the person can devote full attention to reforming information management within the Department. We are particularly troubled by agencies that have vested CIO and Chief Financial Officer responsibilities in one person. The challenges facing agencies in both financial and information management are monumental. Each requires full-time leadership by separate individuals with appropriate talent, skills, and experience in these two areas. In financial management, for example, most agencies are still years away from their goal of having reliable, useful, relevant, and timely financial information--an urgently needed step in making our government fiscally responsible. Because it may be difficult for the CIO of a large department to adequately oversee and manage the specific information needs of the department's major subcomponents, we have also supported the establishment of a CIO structure at the subcomponent and bureau levels. Such a management structure is particularly important in situations where the departmental subcomponents have large information technology budgets or are engaged in major modernization efforts that require the substantial attention and oversight of a CIO. In the Conference Report on the Clinger-Cohen Act, the conferees recognized that agencies may wish to establish CIOs for major subcomponents and bureaus. These subcomponent level CIOs should have responsibilities, authority, and management structures that mirror those of the departmental CIO. We have reported on instances where the subcomponent CIOs were not organizationally positioned and empowered to discharge key CIO functions. For example, in our reviews of FAA's air traffic control (ATC) modernization, which is expected to cost $34 billion through the year 2003, we found that FAA's CIO was not responsible for developing and enforcing an ATC systems architecture. Instead, FAA had diffused architectural responsibility across a number of organizations. As a result, FAA did not have a complete ATC architecture, which in turn has led to incompatible and unnecessarily expensive and complex ATC systems. Additionally, we found that while FAA's CIO was responsible for ATC software acquisition process maturity and improvement, the CIO lacked the authority to implement and enforce process change. Consequently, we reported that (1) FAA's processes were ad hoc, and sometimes chaotic, and not repeatable across ATC projects and (2) its improvement efforts have not produced more disciplined processes. Among other actions, we recommended that FAA establish an effective management structure for developing, maintaining, and enforcing a complete systems architecture and improving software acquisition process improvement and that this management structure be similar to the department-level CIO structure prescribed by the Clinger-Cohen Act. Similarly, in the last few years, we have reported and testified on management and technical weaknesses associated with IRS' Tax Systems Modernization. Among other things, we have noted how important it is for IRS to have a single IRS entity with responsibility for and control over all information systems efforts. Since we first reported on these problems, IRS has taken a number of positive steps to address its problems and consolidate its management control over systems development. However, as we noted in recent briefings to the acting IRS Commissioner and congressional committee staffs, neither the CIO nor any other organizational entity has sufficient authority needed to implement IRS' Systems Life Cycle--its processes and products for managing information technology investments--or enforce architectural compliance agencywide. We will soon be making formal recommendations to IRS to address this issue. Finally, as we reported to you earlier this year, the problems encountered by the Health Care Financing Administration (HCFA) in its development of the Medicare Transaction System provide another example of the need for strong management over the development and implementation of information systems. In recent testimony on Medicare automated systems, we reemphasized the importance of establishing CIOs and involving them and other senior executives in information management decisions. While HCFA has recently established a CIO and an Information Technology Investment Review Board, the agency has not yet implemented an investment process--including senior management roles and responsibilities--that governs the selection, control, and evaluation of IT investments. Consequently, we have recommended that HCFA establish an investment management approach that explicitly links the roles and responsibilities of the CIO and Investment Review Board to relevant legislative mandates and requirements. Such actions are essential to ensure that HCFA's--or any agency's--information technology initiatives are cost-effective and serve its mission. Although the Clinger-Cohen Act did not call for the establishment of a federal CIO Council, the Administration is to be commended for taking the initiative to establish one through a July 1996 Executive Order. Our experience with the CFO Act shows the importance of having a central advisory group to help promote the implementation of financial management reform. The CFO Council, which has a statutory underpinning, has played a lead role in creating goals for improving federal financial management practices, providing sound advice to OMB on revisions to executive branch guidance and policy, and building a professional community of governmentwide financial management expertise. The CIO Council, chaired by OMB, can play a similarly useful role. As stated in its charter, the Council's vision is to be a resource for helping promote the efficient and effective use of agency information resources. The Council serves as the principle forum for agency CIOs to develop recommendations for governmentwide information technology management policies, procedures, and standards; share experiences, ideas, and promising practices for improving promote cooperation in using information resources; address the federal government's hiring and professional development needs for information management; and make recommendations and provide advice to OMB and the agencies on the governmentwide strategic plan required under the PRA. The CIO Council is currently going through a formative period. Since its first meeting in September 1996, the Council has engaged in a wide variety of activities. It meets on a monthly basis, bringing together CIOs, deputy CIOs, and representatives from major departments and agencies, as well as representatives from other organizations, such as the Small Agency Council, the CFO Council, and the Governmentwide Information Technology Services Board. The Council's activities during its first year have largely revolved around four major areas. (1) Council organization: The Council decided how to organize and created operational procedures. (2) Committee specialization: The Council created five committees to focus on selected topics of concern emerging from initial sessions--the year 2000, capital planning and investment, interoperability, information resources management training and education, and outreach/strategic planning. Each committee has pursued agendas that include regular working group sessions to exchange ideas and identify promising management practices. (3) Topical forums: The Council has provided a regular forum for presentations and discussions of specific topics of shared concern, such as improving Internet security, enhancing the usefulness of budgetary reporting on federal information technology, understanding the use of governmentwide acquisition contracting mechanisms, developing effective systems architectures, and consolidating data center operations. (4) Governmentwide policy advice and recommendations: The Council has responded to OMB's solicitation for comments on proposed federal information resources management policy revisions (the Federal Acquisition Regulations, Freedom of Information Act, the Privacy Act, the PRA); updates on critical issues such as Year 2000 progress; and guidance and feedback on agency reporting to meet OMB's federal oversight requirements (such as preparing budget submissions for information assets under OMB Circular A-11). While these activities have proved useful, the Council does not yet have a strategic plan to help guide its work and serve as a benchmark for measuring progress. As we saw in the case of the CFO Council, achieving accomplishments that have strategic impact requires well-defined goals and measures. The CFO Council adopted a vision, goals, and strategies for financial management that have made it a much more productive body. The CFO Council now regularly reviews activities and, if necessary, revises Council priorities. In addition, the Council annually reports on its progress in implementing financial management reforms. Recognizing the need to focus its efforts, the CIO Council began to reassess and redefine its strategic direction this past summer. This October, the Council members met at a day-long planning conference to discuss and finalize their long-range strategy. They agreed to focus their work on five strategic goals: establish sound capital planning and investment processes at the agencies; ensure the implementation of security practices that gain public confidence and protect government services, privacy, and sensitive and national security information; lead federal efforts to successfully implement the Year 2000 conversions; assist agencies in obtaining access to human resources with the requisite skills and competencies to develop, maintain, manage, and utilize information technology programs, projects, and systems; and define, communicate, and establish the major elements of a federal information architecture, in support of government missions, that is open and interoperable. We believe that the CIO Council has selected the right set of issues to pursue. Several of these coincide with issues we raised in our 1997 High-Risk Series and recommendations we have formulated in conjunction with specific audit work. In addition, they parallel several concerns that the Congress--and this Subcommittee in particular--have raised about federal IT management. For example, the regular hearings and concerted effort by the Subcommittee on the Year 2000 computing crises have highlighted the urgency of the problem and helped to increase the attention and actions of federal executives. GAO has raised concerns about the pace at which federal agencies are moving to effectively address the Year 2000 problem. In consonance with industry best practices, we have also developed and disseminated an assessment guide to help agencies plan, manage, and evaluate their Year 2000 programs, and are using this as a basis for selected agency audits. In addition, we have strongly recommended that agencies adopt a capital planning and investment-oriented approach to information technology decision-making. It has been a key foundation for recommending improvements to the management of IRS' Tax Systems Modernization, HCFA's development of the Medicare Transaction System, and FAA's air traffic control modernization. We worked with OMB in 1995 to issue governmentwide guidance on information technology investment management and we have also issued detailed guidance on how agencies can effectively implement an investment-oriented decision-making approach to their information technology spending decisions as expected under the Clinger-Cohen Act. Information security is also an issue of paramount importance to the information maintained and managed by the federal government. We have highlighted the reality of the government's vulnerability and the urgent need to effectively identify and address systemic information security weaknesses. Moreover, in our September 1996 report on information security, we specifically recommended that the Council adopt information security as one of its top priorities. Also, building federal agencies' capability to manage information resources has been a critical problem for years. Several of our recent reports, for instance, have focused on serious weaknesses in an agency's capability to manage major technology initiatives, such as in the area of software acquisition or development. Similarly, our best practices work has shown the importance of pursuing improvement efforts within the context of an information architecture in order to maximize the potential of information technology to support reengineered business processes. We are encouraged by the Council's intention to establish a strong strategic focus for its work and further refine and prioritize the areas where it can best make a difference. One of the noteworthy aspects of the Council's goal-setting process was the members' desire to move away from earlier draft language that defined the goals in terms of "promoting" and "supporting." Instead, the Council is working to frame specific, outcome-oriented goals. At the conclusion of the conference, the Council set up committees for each of the goals and charged them to decide on specific objectives and performance measures. The Council's aim is to complete this work quickly and publish its strategic plan in January 1998. There is great urgency to deal with these major information technology problems. It is important that the Council demonstrate how CIOs are helping to make a difference by showing progress this coming year. GAO and OMB have given the CIO Council a head start by publishing guidance on information technology capital investments, information security, and best practices in information technology management. By leveraging off this work, the Council should be able to build momentum quickly. Also, the CIO Council should follow the example set by the CFO Council, which publishes a joint report with OMB each year on its progress in meeting financial management goals. Having a visible yardstick will provide a strong incentive for both the Council and the agencies to make progress in meeting their information management goals and demonstrate positive impact on the agencies' bottom line performance. Because it is essentially an advisory body, the CIO Council must rely on OMB's support to see that its recommendations are implemented through federal information management policies, procedures, and standards. In the coming months, the Congress should expect to see the CIO Council becoming very active in providing input to OMB on the goals it has chosen. OMB, in turn, should be expected to take the Council's recommendations and formulate appropriate information management polices and guidance to the agencies. There should be clear evidence that the CIO Council, OMB, and the individual CIOs are driving the implementation of information technology reforms at the agencies. Ultimately, the successful implementation of information management reforms depends heavily upon the skills and performance of the entire CIO organization within departments and agencies--not just the CIO as a single individual. We have emphasized this point in our recent guidance on information technology performance measurement. With this in mind, we are working to produce an evaluation guide that offers a useful framework for assessing the effectiveness of CIO organizations. As with our other guidance, we intend to ground this approach in common management characteristics and techniques prevalent in leading private and public sector organizations. Using this methodology that focuses on both management processes and information technology spending results, we can provide the Congress and the agencies with in-depth evaluations of CIO organizational effectiveness. Mr. Chairman, this concludes my statement. I would be happy to answer any questions that you and members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the importance of having strong agency chief information officers (CIO) and an effective CIO Council, focusing on its study of how leading private- and public-sector organizations control system development projects and successfully apply technology to improve their performance, which identified a specific set of strategic practices that these organizations use to improve performance through information management. GAO noted that: (1) senior executives in the successful organizations it studied were personally committed to improving the management of technology; (2) applicable laws make federal agency heads directly responsible for establishing goals and measuring progress in improving the use of information technology to enhance the productivity and efficiency of agency operations and assign a wide range of duties and responsibilities to CIOs; (3) agencies should place CIOs at a senior management level, working as a partner with other senior officials in decisionmaking on information management issues; (4) having effective CIOs will make a difference in building the institutional capacity and structure needed to implement sound management practices; (5) shortly after the Clinger-Cohen Act went into effect, the Office of Management and Budget (OMB) evaluated the status of CIO appointments at 27 agencies and noted that at several agencies, the CIO's duties, qualifications, and placement met the act's requirements; (6) however, OMB had concerns about a number of other agencies that had acting CIOs, CIOs whose qualifications did not appear to meet the act's requirements, or CIOs who did not report directly to the head of the agency; (7) OMB also raised concerns about agencies where the CIOs had other major management responsibilities or where it was unclear whether the CIOs' primary duty was information resource management; (8) one area that GAO will focus on is CIOs who have major responsibilities in addition to information management; (9) only 12 agencies have CIOs whose responsibilities are focused solely on information management; (10) GAO is particularly troubled by agencies that have vested CIO and Chief Financial Officer responsibilities in one person; (11) because it may be difficult for the CIO of a large department to adequately oversee and manage the specific information needs of the department's major subcomponents, GAO has also supported the establishment of a CIO structure at the subcomponent and bureau levels; (12) GAO has reported on instances where the subcomponent CIOs were not organizationally positioned and empowered to discharge key CIO functions; (13) the CFO Council has played a lead role in creating goals for improving federal financial management practices; the Council does not yet have a strategic plan to help guide its work and serve as a benchmark for measuring progress; and (14) ultimately, the successful implementation of information management reforms depends heavily upon the skills and performance of the entire CIO organization within departments and agencies, not just the CIO as an individual.

SSI provides monthly cash benefits to qualified aged, blind, and disabled persons. Because it is a program based on need, monthly changes in the amount of non-SSI income that clients receive can increase or decrease the amount of SSI benefits to which they are entitled or make them completely ineligible for benefits. Resources, including financial accounts, that exceed $2,000 for an individual or $3,000 for a couple make that individual or couple ineligible for the program. To minimize occurrences of over- and underpayments, the program requires clients to promptly report to SSA any fluctuations in their income or assets. As part of the application process, SSI clients are required to disclose all of their income and resources to SSA field staff who process their applications. SSA policy requires that field staff obtain documentation to verify the amount of income and resources that applicants report. It does not require, however, that field staff check for unreported income and resources unless they suspect that applicants are not fully disclosing them. Thus, at the time of application, SSA normally relies on applicants to portray their financial situations accurately. To ensure that newly eligible recipients have accurately portrayed their financial condition and that ongoing recipients continue to do so, SSA uses both financial eligibility reviews, known as redeterminations, and computer matching to verify income and resource levels. During redeterminations, recipients report their income on mail-in questionnaires or in face-to-face or telephone interviews. The method used to contact the client and the frequency of such contacts depend on the likelihood that a client's financial situation will change. Computer matches, which compare the individual's SSI record against data obtained from federal and state agencies, enable SSA to detect some types of income and resources that clients have not reported. The computer matching process to detect undisclosed income compares earnings income reported by clients to the earnings information contained on IRS form W-2s, which employers must file annually with SSA. SSA conducts this match annually. The W-2 match is supplemented twice a year with quarterly earnings information provided by 45 states and the District of Columbia. To do this, SSA sends computer tapes or cartridges containing the names of SSI recipients to each state. The states in turn append to the bottom of these tapes any earnings information pertaining to the SSI recipients residing in their states and then mail the tapes back to SSA. Once SSA receives the tapes, it matches them against the agency's own records to determine if recipients have disclosed all of their earnings to the agency. In order to detect unreported financial accounts, information reported by clients is compared to IRS form 1099s, which are filed annually by financial institutions and contain the amount of interest earned on financial accounts. Because form 1099 data only contain interest accrued on financial accounts, this match can detect only interest-bearing accounts. Each September, SSA conducts this match using data from the previous year, which covers most SSI recipients from that year. A primary cause of SSI overpayments has been that clients do not always disclose their earnings and financial accounts when they apply for benefits or once they are receiving such payments. For example, SSA's fiscal year 1996 payment accuracy study shows that out of a total of $1.6 billion in overpayments, approximately 40 percent (nearly $647.6 million) was the result of nondisclosed earnings and financial accounts. About $379.5 million of these overpayments occurred because SSI clients did not disclose their earnings and $268.1 million occurred because SSI clients did not disclose their financial accounts. Many of these overpayments could have been prevented or more quickly detected if more timely and comprehensive information on the earnings and financial accounts of SSI clients had been available. SSA conducts a second annual payment accuracy study, which contains more detailed information on the amount of overpayments in the SSI program. However, neither study accurately estimates for the entire SSI population the amount of overpayments made because of nondisclosure at the time of application versus the amount made because of nondisclosure after clients began receiving benefits. Regardless, both studies have consistently shown over the years that hundreds of millions of dollars in overpayments occur at both of these junctures. Such findings, in turn, indicate that the agency needs to address systemwide weaknesses in both the application and post-entitlement procedures it uses to determine program eligibility and payment amount. Of the hundreds of millions of dollars in overpayments that have been made, SSA has gotten little of it back. SSA statistics show that, on average, the agency recovers only about 15 percent of all outstanding overpayments. The older the overpayment, the more difficult it is to recover. Moreover, when an individual is removed from SSI's rolls--which can happen when an overpayment is the result of a nondisclosed financial account--the overpayment will probably never be recovered because the individual no longer receives a monthly SSI benefit payment from which SSA can withhold funds. SSA's overpayment recovery rate is low partly because SSI recipients are poor and do not have the funds to repay this debt. SSA's present data sources and procedures for detecting undisclosed earnings do not provide up-to-date and comprehensive information on the earnings of applicants and recipients. Such information is critical because earnings are a primary factor in determining both initial program eligibility and the amount of benefits recipients should receive each month. SSA could obtain such information by using new data sources on earnings and by enhancing its current computer-matching procedures. SSA uses data that are outdated and do not reflect the current earnings status of SSI clients. When individuals apply for SSI benefits, SSA field staff are required to check the agency's database that contains IRS form W-2 information to verify that applicants have accurately portrayed their work histories. How current this information is depends on when SSA enters an applicant's W-2 data and when the applicant comes in to apply for SSI benefits. For example, SSA began entering 1996 W-2 earnings information into its database in February 1997, shortly after it was reported by employers. By April, SSA had entered about 45 percent of the 1996 W-2s into its database, and by September, the agency had entered 98.5 percent of the earnings information. Thus, in April 1997, there was about a 45-percent chance that the 1996 earnings of an SSI applicant would be recorded in SSA's database. Earnings from December 1996 would be 4 months old, and earnings from January 1996 would be 16 months old. If an application were made in April 1998 and the individual's 1997 W-2 information had not yet been entered, the only earnings information available to SSA field staff would be 1996 W-2 information, which would then be 15 to 27 months out of date. After clients have begun receiving SSI payments, SSA checks for undisclosed earnings in two computer matches: a semiannual match that uses quarterly earnings data that employers file with the states, and another that uses the annual W-2 information. Because of the age of the data used in the match, these matches can detect only undisclosed earnings that were received 6 to 21 months in the past. For example, state quarterly data sent to SSA in March 1998 covers earnings through the quarter ending September 1997. If a client had earnings as of September 1997, the March 1998 match would only detect those earnings 6 months after they were received. Similarly, if the client's last earnings occurred as early as July 1997, the March 1998 match would not have detected them until 9 months after they were earned. Because state earnings information is not provided by all states, SSA supplements this match by conducting a computer match each September using W-2 information from the previous year. Thus, if a recipient had earnings in December of the previous year, they would not be discovered for 9 months, and if a recipient had earnings in January of the previous year, this match would not detect them for 21 months. Although the state computer matches provide more current information than the W-2 data match, state data are not always as comprehensive as the W-2 data. First, states provide earnings information to SSA only for current SSI recipients, so this information cannot be used to verify the earnings reported by new SSI applicants. Also, only 45 states and the District of Columbia have agreed to provide SSA with this information. Finally, the process of conducting the match can be unwieldy, and SSA is often not able to complete the match for all participating states. To perform matches, SSA must prepare and send computer tapes or cartridges containing the names of SSI recipients in each state to all participating states. The states in turn provide earnings information, if any, on these recipients to SSA. Often, however, the tapes get lost or damaged in the mail, or the state prepares the data in a format that SSA's computers cannot read. For example, in the first half of 1997, SSA was able to complete the match for only 37 of the 45 states that had agreed to provide the agency with this information. The process of SSA and the states exchanging computer tapes is so cumbersome that even though the states have new information four times a year, SSA only attempts to get it twice a year. New data sources exist that could help improve earnings verification. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) requires that states report the names of newly hired employees as well as all of the quarterly earnings information reported for individuals working in their states to OCSE. OCSE uses this information to identify those parents who could make child support payments. SSA, which helped OCSE develop these databases, is responsible for housing and maintaining them at its National Computer Center and has authority under PRWORA to use the information contained in them. One of these data sources, the New Hire Data Base, identifies newly hired employees and their employers within a month of their hiring. The second database, the Quarterly Wage Data Base, will offer quarterly earnings information that is between 4 and 6 months old. The quarterly information that the states will submit for OCSE's use is the same data that the majority of states now submit to SSA via computer tapes or cartridges. However, the national OCSE database will be a more comprehensive and current information source because all states are required to participate; it will also contain all employees--not just those on the SSI rolls at the time of the match. It will allow SSA to check for earnings anywhere in the country for both applicants and recipients, and SSA will receive data quarterly instead of only biannually. The New Hire Data Base has been operating since October 1997, and as of mid-February 1998, it has received 13.7 million new-hire records, with all states except one transmitting this information electronically over SSA's dedicated, secure network. State employees are already submitting queries to their state directories of new hires and are finding that this has helped them to accurately calculate eligibility and payment amounts for state programs. If SSA sets up its own queries to the New Hire Data Base, the agency could use the improved information to reduce the number of overpayments resulting from the nondisclosure of earnings. States began submitting earnings to the Quarterly Wage Data Base on February 1, 1998. It may be possible to set up both of these databases to receive and respond to requests for information so that SSA field staff could check for undisclosed earnings at the time of application. This would prevent many overpayments that are the result of nondisclosure at the application stage, since these databases will contain earnings information that is between 1 and 6 months old. Such data are often current enough to contain earnings information for the same time period in which benefits are received by many newly eligible recipients. This is because it takes, on average, more than 3-1/2 months for a decision on an SSI disability claim, and newly eligible recipients receive benefits retroactively back to the date when they first applied. SSA could also reduce the number and duration of earnings overpayments to ongoing recipients by using the new earnings data in a more fully automated computer matching process. According to officials from SSA and OCSE, the agency could develop an electronic interface with the New Hire Data Base that retains a continually updated list of SSI recipients and notifies SSA automatically whenever a new hire record is reported for one of those recipients. SSA field staff could then contact the employer listed in this database to verify the applicant's employment and the amount of his or her earnings. In addition, quarterly matching of the SSI rolls against the much larger Quarterly Wage Data Base could be used to detect undisclosed earnings. An automated match could be done at SSA's National Computer Center, eliminating the need for SSA and the states to exchange computer tapes. Under both the current computer matching procedures and these new procedures, field offices would still investigate undisclosed earnings before reducing a recipient's benefits, declaring an overpayment, or both. Recipients, therefore, would still have an opportunity to contest earnings that may not belong to them or that fall under program rules permitting the exclusion of certain income. SSA policy officials acknowledge that more current and comprehensive sources of earnings data exist. According to these officials, SSA is focusing its efforts on developing a comprehensive policy that details which new data sources are the best to use in all of its programs and how they can be used most effectively. Even though the New Hire Data Base is available for immediate use and the Quarterly Wage Data Base will be available in April 1998, SSA is putting minimal effort into incorporating these two databases into its claims handling processes because it will take 1 year for the OCSE databases to contain enough earnings information to be useful for title II programs. However, OCSE databases would be immediately useful to reduce SSI overpayments. In fiscal year 1996, more than twice as many overpayments were made in the SSI program as in the social security retirement program, even though SSI payments were only about one-tenth the size of the retirement program payments. By not using the OCSE databases at this time, serious problems with SSI payment accuracy may continue. In the interim, SSA is focusing on developing access to two alternative data sources: a Department of Labor (DOL) network of states' earnings databases and state-agency maintained databases. The DOL network allows government employees in one state to check on-line for earnings in the earnings databases maintained by any or all of the other states in the network. At the time of our review, 33 states' earnings databases were linked to the network, and there are plans to add the earnings databases of 7 other states to this network in the near future. SSA is also pursuing direct access to state agency databases on earnings; government benefits; and vital statistics information on births, deaths, and marriages. In an earlier report, we recommended that SSA pursue direct access to state data to improve SSI payment accuracy and program administration. While we continue to recommend direct access to state data as the best approach for obtaining information such as state welfare payments and vital statistics information, especially when national databases do not exist, we consider the OCSE databases better sources for earnings information. SSA's approach to obtaining earnings information from the DOL network and states has several shortcomings. First, the agency must negotiate and thereafter renegotiate separate data-sharing agreements with each state.According to SSA officials, these tasks are both difficult and time-consuming. In the last several years, SSA has been actively seeking data-sharing agreements with states, but as of November 1997, only nine had agreed to provide direct access to their earnings data. Second, these alternative sources will not necessarily provide SSA with nationwide earnings information, which is essential for detecting the undisclosed earnings of clients who work in one or more states and apply for benefits in yet another. States are not required to participate in the DOL network or to grant SSA employees direct access to their data. Therefore, neither of these two alternative data sources ensures nationwide coverage. Further, of the nine states that have granted direct access to SSA field staff, none have done so for SSA staff located in other states. In contrast, all states are required by law to provide data to the New Hire Data Base and the Quarterly Wage Data Base. Moreover, because PRWORA gives SSA the authority to use these two databases in the administration of its programs, negotiation and renegotiation of data-sharing agreements with the states will not be necessary. Third, and perhaps most significant, neither the DOL network nor direct access to state earnings data will provide employment information as current as that in the New Hire Data Base. The New Hire Data Base will allow SSA to determine within a period of weeks that an SSI recipient has taken a job, instead of waiting a minimum of 4 months, which generally is the delay for data obtained through on-line access or the DOL network. As is the case with earnings, SSA's present data sources and procedures for detecting undisclosed financial accounts do not provide up-to-date and comprehensive information on the accounts of applicants and recipients. Because undisclosed financial accounts are a major source of overpayments, obtaining such information is critical to ensuring program integrity. Detection of such accounts, both at the application stage and once recipients are on SSI's rolls, would prevent many of these overpayments and reduce the number and duration of others. Such detection may be possible because it is now technologically feasible for SSA to electronically obtain account information directly from the financial industry. SSA's current approach to identifying financial accounts can result in ineligible individuals getting on SSI's rolls and remaining there for long periods of time. During the application process, SSA policy requires that field staff contact banks to verify the amount of money in the accounts of applicants who state that their accounts exceed $1,250. However, when applicants state that they either do not have accounts or that their accounts are below the $1,250 threshold, such verification is generally not required. Once applicants are placed on SSI's rolls, SSA checks for both unreported and underreported financial accounts through a computer match using IRS form 1099 data. Computer matches using IRS form 1099 data can take months or even years to detect unreported bank accounts. These matches compare the financial account information reported to the IRS by financial institutions with the information concerning financial accounts reported by SSI recipients. SSA conducts this computer match every September. However, at the time of this match, the IRS 1099 data are between 9 and 21 months old. For example, tax year 1997 data will not be available for use in these matches until September 1998. Thus, if an SSI recipient acquired an account in December 1997 that caused the recipient's assets to exceed SSI's resource limit, SSA would not be able to detect it for at least 9 months. If the account was acquired in January 1997, the recipient could have received monthly SSI payments to which he or she was not entitled for 21 months before the IRS 1099 match could detect the overpayment. In addition, if the account did not earn interest, this match would not detect it at all, since 1099 data only pertain to interest-bearing accounts. SSA field staff are required to verify the amount of financial accounts over $1,250 that applicants and recipients disclose as well as those that are detected through the IRS 1099 computer match. This is done by submitting to the designated financial institution a paper request for verification of the account balance for all months during which the individual was receiving SSI payments. SSA submits about 1 million requests to financial institutions each year. Financial institution staff, in turn, manually search their records and mail a response, along with an invoice for this service, back to the requesting SSA field staff. Because this is very time-consuming for the financial institutions, they may charge up to $25, and some may not respond at all. The telecommunication network linking the financial industry together nationwide allows financial institutions to transfer funds among themselves and provide customer services such as automated bill payment and automated teller machines (ATM). SSA first began to use these networks to deposit benefit payments directly into the accounts of SSI recipients. Over the past few years, the agency has expanded its use of these networks to more fully automate direct deposits. For example, these networks are now used to notify a specific financial institution of the death of a customer who had a direct-deposit account for SSA program benefits. These networks are also used to set up direct-deposit accounts automatically for newly eligible recipients of SSA program benefits, eliminating the need for the recipient to contact the financial institution to set up an account. According to various experts--such as officials from SSA and the Department of the Treasury, financial industry executives, and network providers--it may be possible to further expand the use of these networks to enable SSA to contact financial institutions electronically and determine whether SSI clients have accounts that they have not disclosed as well as verify the amount in accounts that clients have disclosed. Detecting undisclosed accounts when individuals apply for SSI benefits would prevent ineligible applicants from being placed on SSI's rolls. In addition to preventing significant overpayments, the agency would save the costs associated with processing invalid claims and determining medical and vocational disability for ineligible applicants. According to financial institution officials we spoke with, handling requests electronically would also be less costly and easier for them than the current paper-based system and would provide the information to SSA more quickly than the current system allows. Many of these experts also pointed out that financial industry networks could be used to verify account information for both SSI applicants and recipients. To identify accounts undisclosed by an applicant, SSA field staff could submit a query to financial institutions with the name, social security number, and other identifying information of the applicant over one or more of the networks. These institutions could then electronically provide applicant account information, including balances, if any. To identify current SSI recipients who have failed to disclose accounts, SSA could use the networks to periodically transmit a file of current SSI recipients to financial institutions selected according to criteria specified in computer profiles. Most financial institutions' computer systems have the capability to automatically check their files on account holders to see if there are any matches with the SSI recipient list. If matches are found, the system would send an electronic response to SSA containing the recipients' names and account balances. Financial industry data would be much more current than the data used in the IRS form 1099 match because financial institutions maintain up-to-date records of their customers' accounts. This does not mean that an overpayment could be detected as soon as an undisclosed account came into existence because the earliest point of detection would depend on how frequently SSA conducted matches using these data. It does mean, however, that SSA, working with the financial institution industry, could design a system that optimally balanced how frequently undisclosed accounts were detected with the cost-effectiveness of such a procedure. It also means that SSA could identify undisclosed accounts much earlier than it currently does and thereby prevent many overpayments made as a result of nondisclosure. For SSA to detect undisclosed accounts most effectively, every applicant and recipient would have to be checked against the records of every financial institution in the country. The extent to which complete coverage could be achieved would depend upon technological capabilities. According to executives who manage the financial industry networks, current technology is sufficient to permit very broad-based checks for applicants, with minimal cost and effort. Financial institutions and human services departments in some states are already exploring ways in which technology can more efficiently provide the required information on the financial accounts of welfare clients. This is occurring in part because PRWORA requires financial institutions to report this information to the states for child support enforcement purposes. In its 1997 business plan, SSA acknowledged that it intends to look into expanding its use of these networks to check for undisclosed accounts, but the agency has yet to put together a proposal detailing when and how it will undertake such a study. SSA already has a telecommunication link to the financial industry network and routinely uses that network to transmit information to financial institutions. However, programming would be needed for SSA to transmit requests for information and for financial institutions to notify the agency that it has an account holder who is an SSI applicant or recipient. SSA officials and executives from the financial industry with whom we spoke agreed that using the financial institution network to verify financial accounts is technically feasible but would require effort to implement. Because financial institutions use various types of computer operating systems and software, each institution would have to create, test, and implement programming specific to its system. States and the financial industry share concerns about privacy and security. Privacy concerns center around ensuring that personal information provided by an individual to a government agency or private institution is protected from being disclosed to those who do not have a legal right to it. Concerns about security center around having adequate computer security controls to ensure physical security and prevent inappropriate access. SSA is required by law to take certain steps to ensure the privacy and security of data, whether that information is internal to SSA or is shared with other entities. These steps include developing a security plan, audit trails, automated alerts to prevent inappropriate requests for personal information, personal identification numbers and passwords, training, disaster recovery plans, and periodic internal and external evaluations of all privacy and security measures. An assessment of whether to institute additional measures may also be needed. The two OCSE earnings databases, as well as data from the financial institution industry, would provide SSA with information needed to prevent or reduce overpayments resulting from undisclosed earnings and financial accounts. This information would be particularly valuable in processing applications because, for the first time, the agency would be able to verify with more current and comprehensive information the financial allegations of applicants before initiating payments to them. Preventing overpayments or detecting them more quickly would bolster the integrity of the SSI program by more effectively ensuring that clients are receiving only those benefits to which they are entitled. We estimated that approximately $647.6 million of the overpayments that occurred in fiscal year 1996 could have been avoided or more quickly detected if these data had been available for SSA to use both in the application process and at intervals after clients were on SSI's rolls. SSA has authority to use the OCSE databases for the administration of its programs and is responsible for housing and maintaining them at its National Computer Center. The agency has not, however, directed adequate resources to developing computerized interfaces so that these data could be used in the SSI program. The agency also has authority to verify information on the financial accounts of clients from the financial industry but has not yet investigated the technical and economic feasibility of obtaining this information via computer to make it an effective verification tool. Such a system may be economically feasible, even though it would result in SSA verifying more financial accounts than they currently do. According to financial industry experts, computerized verification requests would cost much less than the financial institutions' current charge for such requests--which can be as much as $25 per request. Moreover, if SSA were able to obtain financial account information free of charge, as is the case for most states, this system would be even more cost-effective. We recommend that the Commissioner of SSA take the following actions: Develop computerized interfaces necessary to access OCSE's New Hire Data Base and Quarterly Wage Data Base, and use them in accordance with applicable security and privacy laws and regulations to detect undisclosed earnings during initial and subsequent determinations of eligibility for the SSI program. Study the feasibility of obtaining computerized information from financial institutions to detect financial accounts that SSI clients do not report during the application process and during subsequent determinations of eligibility. Such a study should include a comparison of the cost of obtaining and using such information and the program savings achievable as a result of that use. Security and confidentiality issues should also be addressed. In commenting on a draft of this report, SSA agreed that the two OCSE databases can be useful tools in reducing SSI overpayments and stated that they intend to begin using them by October 1, 1998. The agency objected, however, to our characterization that it is putting minimal effort into incorporating these databases into the verification process. At the time of our review, SSA was actively developing access to only one of these databases and only doing so to detect the undisclosed earnings of recipients once they are placed on SSI's rolls. Yet, overpayment prevention is equally or more important than overpayment detection because only a small fraction of overpayments that are made are recovered. Field staff could use these databases to prevent overpayments by checking for undisclosed earnings at the time of application. This requires that the agency develop the necessary computer interfaces between SSA field offices and these databases. At the time of our work, the agency had not begun developing these interfaces and did not appear to have any concrete plans to do so. SSA also agrees with our recommendation to study the feasibility of using information from financial institutions to detect undisclosed financial accounts. The agency plans to undertake such a study and issue its first status report no later than September 1998. SSA's other comments to this report were incorporated where appropriate. The agency's comments are contained in appendix II. We are sending copies of this report to relevant congressional committees, the Commissioner of Social Security, and other interested parties. If you have any questions about this report, please contact me on (202) 512-7215 or Roland Miller III, Assistant Director, on (202) 512-7246. Other major contributors to this report were Nancy Cosentino, Senior Evaluator, and Jill Yost, Evaluator. Originally, the requester of this work, Congressman E. Clay Shaw, Jr., asked that GAO investigate (1) the type of data that SSA now gets from federal agencies to identify SSI overpayments, (2) whether federal agencies have additional computerized information on the income of SSI clients that SSA is not receiving but would find helpful in reducing overpayments, and (3) whether direct access to the income data maintained by federal agencies is technically and fiscally feasible and would reduce overpayments. The agencies we examined were (1) the IRS, which provides form 1099 information to detect undisclosed financial accounts; (2) the Office of Personnel Management (OPM), which provides information to detect undisclosed federal pensions; (3) the Department of Veterans Affairs (VA), which provides information to detect VA compensation and pensions; and (4) the Department of Defense (DOD), which provides information to detect income from military pensions, military housing, and other incidentals. The report details what we discovered about the manner in which SSA receives IRS form 1099 data and how obtaining these data electronically from the financial industry could prevent or reduce overpayments caused by undisclosed financial accounts. However, we found that the amounts of SSI overpayments that resulted from earnings and assets that clients receive from OPM, VA, and DOD either were not large enough to warrant a detailed study into how SSA could obtain information from these agencies more quickly or were obtained in such a way as to allow the detection of overpayments within 1 to 2 months after the time they were incurred. In the course of our work, we also discovered that a new data source that could prevent or reduce overpayments caused by undisclosed earnings would soon be available. Given that the nondisclosure of earnings and financial accounts, unlike federal benefits, are major sources of SSI overpayments, we asked the requester whether he would like to change the objectives of the study. He responded in the affirmative, stating that he would like us to examine (1) the extent to which overpayments occur because SSI applicants and recipients fail to disclose their earnings and financial accounts, (2) whether SSA could obtain more current and comprehensive information than it does now to detect the nondisclosure of earnings, and (3) whether the agency could also obtain more current and comprehensive information on financial accounts. We interviewed executives from four banks and four financial industry network providers. We also interviewed officials from SSA, OMB, IRS, OCSE, the Federal Reserve, and the Department of the Treasury and obtained relevant documentation. From these interviews, we ascertained the feasibility of using financial industry data to verify bank account information supplied by SSI clients and how it could be done. We also interviewed government officials to determine to what extent the earnings information from the OCSE databases would be more current and comprehensive than the data presently used by SSA to verify earnings information reported by SSI clients. We examined (1) the comparative value of these new data sources versus the data sources currently used by SSA, (2) how SSA currently verifies client-supplied information on earnings and financial accounts, (3) how the new data sources could be most effectively used for verification purposes, and (4) the issues involved in implementing the use of the new data sources. Finally, we obtained nationwide aggregate data from SSA studies on the amount of overpayments that occurred in fiscal year 1996. 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Pursuant to a congressional request, GAO conducted a follow-up review on the feasibility of the Social Security Administration (SSA) using new data sources on earnings and financial account information to determine applicants' eligibility for the Supplemental Security Income (SSI) program, focusing on: (1) the extent to which overpayments occur because SSI clients fail to disclose their earnings and financial accounts; (2) whether SSA could obtain more current and comprehensive information to detect undisclosed earnings; and (3) whether the agency could obtain more current and comprehensive information on undisclosed financial accounts. GAO noted that: (1) unreported or underreported earnings and financial accounts continue to result in significant overpayments in the SSI program; (2) according to SSA's overpayment data, the failure of SSI clients to disclose earnings and financial accounts was responsible for approximately 40 percent of the $1.6 billion in overpayments identified for fiscal year 1996; (3) specifically, about $379.5 million in overpayments was the result of SSI clients not fully disclosing their earnings, and $268.1 million was the result of clients not disclosing financial account information; (4) more current and comprehensive information is now available to detect undisclosed earnings; (5) SSA detects overpayments resulting from undisclosed earnings primarily by matching information provided by SSI clients with earnings data used in the administration of other government programs; (6) however, computerized matches, which are not done until individuals are on SSI's rolls, have built-in delays in detecting overpayments that range from 6 to 21 months; (7) two databases developed for use by the Office of Child Support Enforcement (OCSE) could provide SSA with more current and comprehensive earnings information; (8) SSA could check these databases prior to placing applicants on the rolls and thereby prevent overpayments caused by applicants failing to disclose earnings at the time of application; (9) these databases would also allow SSA to detect occurrences of undisclosed earnings to ongoing recipients within 4 to 6 months and thereby reduce the number and duration of the corresponding overpayments; (10) opportunities for improved financial account information also exist; (11) SSA detects undisclosed financial accounts by conducting computer matches once a client's eligibility has been established; (12) this match, however, can only detect undisclosed accounts that existed 9 to 21 months before; (13) SSA could obtain up-to-date information on the financial accounts of SSI clients from financial institutions by accessing the nationwide telecommunication network, which links all financial institutions; (14) such information would help ensure that applicants whose bank accounts would make them ineligible for the program do not gain eligibility; and (15) by eliminating ineligible individuals at the point of application, SSA could avoid the expense of determining medical and vocation disability and could also reduce the number and duration of overpayments to ongoing recipients who are overpaid because of newly acquired financial accounts or increases in existing ones.

Currently, FAA authorizes all domestic military; public (academic institutions, federal, state, and local governments including law enforcement organizations); and civil (private sector entities) UAS operations on a limited basis after conducting a case-by-case safety review. Federal, state, and local government agencies must apply for Certificates of Waiver or Authorization (COA), while civil operators must apply for special airworthiness certificates in the experimental category. Because special airworthiness certificates do not allow commercial operations, there is currently no means for FAA to authorize commercial UAS operations. Since FAA started issuing COAs in January 2007, 1,428 COAs have been issued. At present, under COA or special airworthiness certification, UAS operations are permitted for specific time frames (generally 12 to 24 months); locations; and operations. So, one agency can be issued multiple COAs to operate one UAS for the same purpose. In 2012, FAA issued 391 COAs to 121 federal, state, and local government entities across the United States, including law enforcement entities as well as academic institutions (see fig. 2). According to an industry forecast, the market for government and commercial use of UAS is expected to grow, with small UAS having the greatest growth potential. This forecast estimates that the worldwide UAS market could be potentially worth $89 billion over the next decade. The majority of this estimate is for military-type products (primarily the U.S. military) with the associated research and development for production estimated to be $28.5 billion over the next 10 years. As smaller UAS are expected to continue to improve in technology and decrease in price, their prevalence in the national airspace is expected to increase. The forecast also indicates that the United States could account for 62 percent of the world's research and development investment for UAS technology over the coming decade. Congress has tasked FAA to lead the effort of safely integrating UAS into the national airspace, but several other federal agencies--such as the Department of Defense (DOD), Department of Homeland Security (DHS), and the National Aeronautics and Space Administration (NASA)--also have a role. While DOD uses UAS for training and operational missions, DHS for border patrol, and NASA for scientific research, each agency provides FAA with safety, reliability, and performance data through the COA process. These agencies also participate in UAS integration forums as discussed later in this section. Table 1 provides an overview of key federal UAS stakeholders and their roles in integrating UAS. FAA has established various mechanisms to facilitate collaboration with its partner agencies, and private sector entities to safely integrate UAS (see table 2). For example, given its unique role in managing partnerships among federal agencies for the Next Generation Air Transportation System (NextGen), FAA's Joint Planning and Development Office (JPDO) was tasked by the Office of Management and Budget to, in conjunction with partner agencies, develop a strategic interagency UAS Research, Development, and Demonstration Roadmap. This roadmap provides a framework for interagency and private sector coordination on UAS research and development efforts. Several working groups have also been formed, such as the UAS Executive Committee, to facilitate collaboration between agencies. FAA has also entered into memorandums of understanding (MOU) with some of these federal agencies. FAA signed MOUs with NASA and DOD regarding research and development and the availability of safety data, respectively. FAA has also involved industry stakeholders and academia through the UAS Aviation Rulemaking Committee and RTCA SC-203. For example, the RTCA SC-203 (a standards-making body) is developing safety, reliability, and performance standards for UAS operations. FAA also has agreements with a range of industry, federal research entities, universities, and international organizations to conduct research. These research and development agreements, known as Cooperative Research and Development Agreements and International Agreements, typically require the agency, organization, or company to perform types of research and provide FAA with the data in exchange for funding. For example, in 2009 FAA established an agreement with the European Union to initiate, coordinate, and prioritize the activities necessary for supporting the development of provisions required for the evolution of UAS to full recognition as a legitimate category-of-airspace user. In addition, FAA partners with federally funded research and development centers on UAS integration efforts. Within FAA, steps have also been taken to increase collaboration and provide the organizational leadership needed to safely accelerate UAS integration. FAA recently created the UAS Integration Office under one executive to provide stable leadership and focus on the FAA UAS integration efforts. The office will coordinate all intra-agency collaboration efforts. At this time, some UAS responsibilities are being handled in other offices throughout FAA. For example, some of the research and development efforts and analysis of operation and safety data are being performed by the Air Traffic Office and the Accident, Investigation, and Prevention Office, respectively. The UAS Integration Office reports directly to the Director of the Flights Standards Service, which provides visibility for the office. At this time, several planning efforts are under way in the office. However, because the reorganization has only recently been implemented, it remains unclear whether the office will provide the support needed to guide a collaborative effort given the complexities of safely integrating UAS into the national airspace. While collaboration mechanisms have been developed to help facilitate UAS integration into the national airspace, continued collaboration among UAS stakeholders will be critical to minimizing duplication of research and addressing implementation obstacles. For example, as we previously reported in our September 2012 report, federal agencies have not yet stepped forward to proactively address the growing concerns regarding the potential security and privacy implications of UAS. We recommended that DOT, DHS, and the Attorney General initiate discussions, prior to the integration of UAS into the national airspace, to explore whether any actions should be taken to guide the collection and use of UAS-acquired data. As we discuss later in this statement, FAA and DOD will need to continue to work together to determine how to leverage DOD's operational and safety data to help develop UAS operations standards, which is a critical step in the integration process. While we did not evaluate the collaboration mechanisms already in place, stakeholders told us that collaboration was occurring, but efforts could be improved. Specifically, stakeholders told us they would like to see additional leadership from FAA. FAA has several efforts under way to satisfy the 2012 Act's requirements, most of which must be achieved between May 2012 and December 2015. See table 3 for a list of selected requirements and the status of FAA's efforts to meet them. FAA has made progress toward these selected requirements. Of the seven deadlines that had passed, however, FAA had completed two as of January 2013. These requirements can be considered under four categories: (1) developing plans for integrating UAS into the national airspace; (2) changing the COA process; (3) integrating UAS at six test ranges; and (4) developing, revising, or finalizing regulations and policies related to UAS. The following provides additional information on the status of FAA's efforts to meet the requirements under these four categories: Comprehensive plan and roadmap for UAS integration. FAA, with the assistance of JPDO, is developing several planning documents required by the 2012 Act, including a 5-year roadmap and comprehensive plan to outline steps toward safe integration. As of January 2013, FAA officials told us they were in the final stages of reviewing and approving these documents and expected to make them publically available by the February 14, 2013 deadline. In light of the timeframes and complicated tasks involved in achieving the requirements, in September 2012, we recommended that FAA incorporate mechanisms in its 5-year roadmap and comprehensive plan that allow for regular monitoring to assess progress toward safe and routine access of UAS into the national airspace. Incorporating regular monitoring can help FAA understand what has been achieved and what remains to be done and help keep Congress informed about this significant change to the domestic aviation landscape. While FAA concurred with our recommendation, because these documents were not publically available as of January 2013, it remains unclear whether they include mechanisms for monitoring progress. Changes to the COA process. FAA has changed the existing COA process in response to the 2012 Act, including taking steps to expedite COAs for public safety entities and developing agreements with government agencies to expedite the COA or waiver process. To help expedite COAs for public safety entities, FAA extended the length of UAS authorization from a 12-month period to a 24-month period so that those entities receiving COAs do not have to reapply as frequently. In addition, FAA made additional changes to simplify the COA application process, including automating the application process through an online form. FAA also worked with DOJ's National Institute of Justice to develop an MOU to meet the operational requirements of law enforcement entities, which are expected to be early adopters of small UAS. Officials from both FAA and DOJ have reached agreement on a draft version of the MOU establishing this process. However, this MOU is still under legal review at FAA and DOJ. Test ranges. FAA has taken steps to develop, but has not yet established, a program to integrate UAS at six test ranges, as required by the 2012 Act. As part of these ranges, FAA must safely designate airspace for integrated manned and unmanned flight operations, develop certification standards and air traffic requirements for UAS, ensure the program is coordinated with NextGen, and verify the safety of UAS and related navigation procedures before integrating them into the national airspace. FAA expects data obtained from these test ranges will contribute to the continued development of standards for the safe and routine integration of UAS. In March 2012, FAA issued a Request for Comments in the Federal Register and received a number of comments. FAA officials told us they are still working to meet all of the specified requirements for the test ranges and had expected to issue a Screening Information Request to initiate the competitive bid process for selecting the six test ranges in July 2012. However, because of privacy concerns regarding the collection and use of UAS-acquired data expressed by commenters, the internal review process of the Screening Information Request was delayed. FAA officials said they hired a privacy expert to help develop a strategy to address these concerns and are working to incorporate this strategy in its Screening Information Request. As of January 2013, officials noted that FAA expects to release the Screening Information Request in the next 4 to 6 weeks. Rulemaking. While FAA has efforts under way supporting a rulemaking for small UAS, as required by the 2012 Act, it is uncertain whether FAA will meet the August 2014 deadline. In fact, the agency's rulemaking efforts for UAS date back more than 5 years, when it established the small UAS Aviation Rulemaking Committee in 2008. In August 2011, FAA initially provided the Secretary of Transportation with its draft Notice of Proposed Rulemaking (NPRM). FAA officials told us in January 2013 that the FAA is still internally reviewing the draft and working to agree on the NPRM's language. According to the officials, FAA has not determined when it might issue the NPRM. As we reported in 2012, many entities have research and development efforts under way to mitigate obstacles before UAS are allowed to operate safely and routinely in the national airspace. Some of these obstacles and related research include vulnerabilities in UAS operations, such as sense and avoid; command, control, and communications, including lost link, dedicated radio-frequency spectrum, and Global Positioning System (GPS) jamming and spoofing; and human factors. However, these research and development efforts cannot be completed and validated without safety, reliability, and performance standards, which have not yet been developed because of data limitations. To date, no suitable technology has been deployed that would provide UAS with the capability to sense and avoid other aircraft and airborne objects and to comply completely with FAA regulatory requirements of the national airspace. However, research and development efforts by FAA, DOD, NASA, and MITRE, among others, suggests that potential solutions to the sense and avoid obstacle may be available in the near term. Since 2008, FAA and other federal agencies have managed several research activities to support meeting the sense and avoid requirements. DOD officials told us that the Department of the Army is working on a ground-based sense and avoid system that will detect other airborne objects and allow the pilot to direct the UAS to maneuver to a safe location. The Army has successfully tested one such system, but it may not be useable on all types of UAS. Another potential system to address this obstacle is an airborne sense and avoid system, which could equip UAS with the same GPS-based transponder system that will be used in FAA's NextGen air-traffic-management system and with which some manned aircraft are starting to be equipped. In 2012, NASA researchers at Dryden Flight Research Center successfully tested an automatic dependent surveillance-broadcast (ADS-B) transponder system on its Ikhana UAS. An airborne sense and avoid system could include ADS- B, along with other sensors such as optical/infrared cameras and radar. Ensuring uninterrupted command and control for both small and large UAS remains a key obstacle for safe and routine integration into the national airspace. Since UAS fly based on pre-programmed flight paths and by commands from a pilot-operated ground control station, the ability to maintain the integrity of command and control signals are critically important to ensure that the UAS operates as expected and as intended. In a "lost link" scenario, the command and control link between the UAS and the ground control station is broken because of either environmental or technological issues, which could lead to loss of control of the UAS. To address this type of situation, UAS generally have pre-programmed maneuvers that may direct the UAS to hover or circle in the airspace for a certain period of time to reestablish its radio link. If the link is not reestablished, then the UAS will return to "home" or the location from which it was launched, or execute an intentional flight termination at its current location. It is important that air traffic controllers know where and how all aircraft are operating so they can ensure the safe separation of aircraft in their airspace. FAA and MITRE have been measuring the impacts of lost link on national airspace safety and efficiency, but the standardization of lost link procedures, for both small and large UAS, has not been finalized. Currently, according to FAA, each COA has a specific lost link procedure unique to that particular operation and air traffic controllers should have a copy for reference at all times. Until procedures for a lost link scenario have been standardized across all types of UAS, air traffic controllers must rely on the lost link procedures established in each COA to know what a particular UAS will do in such a scenario. Progress has been made in obtaining additional dedicated radio- frequency spectrum for UAS operations, but additional dedicated spectrum, including satellite spectrum, is still needed to ensure secure and continuous communications for both small and large UAS operations. The lack of protected radio-frequency spectrum for UAS operations heightens the possibility that a pilot could lose command and control of a UAS. Unlike manned aircraft--which use dedicated, protected radio frequencies--UAS currently use unprotected radio spectrum and, like any other wireless technology, remain vulnerable to unintentional or intentional interference. This remains a key security and safety vulnerability because, in contrast to a manned aircraft in which the pilot has direct physical control of the aircraft, interruption of radio transmissions can sever the UAS's only means of control. UAS stakeholders are working to develop and validate hardware and standards for communications operating in allocated spectrum. For example, FAA's UAS Research Management Plan identified 13 activities designed to mitigate command, control, and communication obstacles. One effort focused on characterizing the capacity and performance impact of UAS operations on air-traffic-control communications systems. In addition, according to NASA, it is developing, in conjunction with Rockwell Collins, a prototype radio for control and a non-payload communications data link that would provide secure communications. The jamming of the GPS signal being transmitted to the UAS could also interrupt the command and control of UAS operations. In a GPS jamming scenario, the UAS could potentially lose its ability to determine its location, altitude, and the direction in which it is traveling. Low cost devices that jam GPS signals are prevalent. According to one industry expert, GPS jamming would become a larger problem if GPS is the only method for navigating a UAS. This problem can be mitigated by having a second or redundant navigation system onboard the UAS that is not reliant on GPS, which is the case with larger UAS typically operated by DOD and DHS. Encrypting civil GPS signals could make it more difficult to "spoof" or counterfeit a GPS signal that could interfere with the navigation of a UAS. Non-military GPS signals, unlike military GPS signals, are not encrypted and transparency and predictability make them vulnerable to being counterfeited, or spoofed. In a GPS-spoofing scenario, the GPS signal going from the ground control station to the UAS is first counterfeited and then overpowered. Once the authentic (original) GPS signal is overpowered, the UAS is partially under the control of the "spoofer." This type of scenario was recently demonstrated by researchers at the University of Texas at Austin at the behest of DHS. During the demonstration at the White Sands Missile Range, researchers spoofed one element of the unencrypted GPS signal of a fairly sophisticated small UAS (mini-helicopter) and induced it to plummet toward the desert floor. The research team found that it was straightforward to mount an intermediate-level spoofing attack, such as controlling the altitude of the UAS, but difficult and expensive to mount a more sophisticated attack. The research team recommended that spoof-resistant navigation systems be required on UAS exceeding 18 pounds. UAS stakeholders have been working to develop solutions to human factor issues for both small and large UAS. According to FAA, human factors research examines the interaction between people, machines, and the environment to improve performance and reduce errors. Human factors are important for UAS operations as the pilot and aircraft are not collocated. The separation of pilot and aircraft creates a number of issues, including loss of sensory cues valuable for flight control, delays in control and communications loops, and difficulty in scanning the visual environment surrounding the unmanned aircraft. As part of its UAS Integration in the National Airspace System Project, NASA is working to develop human factor guidelines for ground control stations and plans to share the results with RTCA SC-203 to inform recommended guidelines. In addition, the Department of the Army is working to develop universal ground control stations, which would allow UAS pilots to fly different types of UAS without having to be trained on multiple configurations of a ground control station. The development of standards for UAS operations is a key step in the process of safe integration and supporting research and development efforts. Setting standards, certification criteria, and procedures for sense and avoid systems as well as protocols to be used for the certification of command, control, and communication systems will guide research and development efforts toward a specifically defined goal. Once the standards are developed, FAA will use the standards in UAS regulations. Currently, UAS continue to operate as exceptions to the regulatory framework rather than being governed by it. Without specific and permanent regulations for safe operation of UAS, federal stakeholders, including DOD and NASA, continue to face challenges and limitations on their UAS operations. The lack of final regulations could hinder the acceleration of safe and routine integration of UAS into the national airspace. Standards-making bodies are currently developing safety, reliability, and operational standards. While progress has been made, the standards development process has been hindered, in part, because of FAA's inability to use safety, reliability, and performance data from DOD, the need for additional data from other sources, as well as the complexities of UAS issues in general. As we previously reported, while DOD provided FAA with 7 years of data in September 2011, FAA officials told us they have been unable to use this data to develop standards because of differences in definitions and uncertainty about how to analyze these data. To mitigate these challenges FAA has been working with DOD to develop an MOU and better identify what data are needed. Finally, FAA is also working with MITRE to develop a data collection tool that will allow officials to better analyze the data they receive from DOD. The establishment of six test ranges, as previously discussed, and the designation of permanent areas of operation in the Arctic could provide FAA with two potential new sources of safety, reliability, and performance data for UAS. However, it is unclear when the test ranges and Arctic area will be operational. Use of these data will be important in developing safety, reliability, and performance standards, which are needed to guide and validate the supporting research and development efforts. According to an RTCA official, both DOD and NASA are sharing the results of their UAS flight experience and research and development efforts to assist RTCA in the standards development process. The RTCA official suggested that the standards-making process might be accelerated if it could start by producing an initial set of standards for a specific UAS with a clearly defined mission. The committee could then utilize those initial standards, along with the subsequent safety and performance data from those operations, to develop additional standards for increasingly complex UAS functions and missions. FAA and NASA are taking steps to ensure the reliability of both small and large UAS by developing a certification process specific to UAS. Currently, FAA has a process and regulations in place for certifying any new manned aircraft type and allowing it access to the national airspace. FAA's Research and Development office is working to identify the substantive differences in how to meet the certification standards for manned and unmanned aircraft. According to its 2012 Research Management Plan, the office has six activities under way that support the development of UAS-specific certification and airworthiness standards. In closing, UAS integration is an undertaking of significant breadth and complexity that touches several federal agencies. Congress has highlighted the importance of UAS integration by establishing statutory requirements and setting deadlines for FAA. FAA, as the lead agency, faces the daunting task of ensuring that all of the various efforts within its own agency, as well as across agencies and other entities, will align and converge in a timely fashion to achieve UAS integration within these deadlines. Because of concerns about the agency's ability to meet deadline requirements, we recommended that FAA incorporate regular monitoring of its efforts to assess progress toward fulfilling its requirements outlined in the 2012 Act. Incorporating regular monitoring will help to inform stakeholders and Congress about what has been achieved and what remains to be done and help FAA build stakeholder confidence in its ability to achieve UAS integration in a safe and timely manner. In addition, the various entities' research and development efforts require continued collaboration to address the critical issues that need to be resolved before UAS are allowed to operate safely and routinely in the national airspace. This collaboration will be important to help align research and development goals across federal agencies and minimize duplication of research or inefficient use of resources. Chairman Broun, Ranking Member Maffei, 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 H. Brandon Haller, Assistant Director; Heather Krause, Assistant Director; Cheryl Andrew; Colin Fallon; Rebecca Gambler; Geoffrey Hamilton; Daniel Hoy; Brian Lepore; Sara Ann Moessbauer; Faye Morrison; Jeffrey Phillips; Nalylee Padilla; and Melissa Swearingen. 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.

Unmanned aircraft systems are aircraft and associated equipment that do not carry a pilot aboard, but instead operate on pre-programmed routes or are manually controlled by pilot-operated ground stations. Although current domestic uses of UAS are limited to activities such as law enforcement, forensic photography, border security, and scientific data collection, UAS also have a wide range of other potential commercial uses. According to an industry forecast, the market for UAS is expected to grow and could be potentially worth $89 billion over the next decade. Concerned with the pace of UAS integration into the national airspace, Congress established specific requirements and set deadlines for FAA in the 2012 FAA Modernization and Reform Act (the 2012 Act). This testimony discusses 1) the roles and responsibilities of and coordination among federal agencies and other UAS stakeholders involved in integrating UAS, 2) FAA's progress in complying with the 2012 Act's UAS requirements, and 3) research and development efforts by FAA and other entities to address challenges for safely integrating UAS. This testimony is based on a 2012 GAO report. In past work, GAO analyzed FAA's efforts to integrate UAS into the national airspace, the role of other federal agencies in achieving safe and routine integration, and research and development issues. GAO also conducted selected interviews with officials from FAA and other federal agencies, industry, and academic stakeholders. While Congress has tasked FAA to lead the effort of safely integrating unmanned aircraft systems (UAS) in the national airspace, several federal and other entities also have a role. FAA has established various mechanisms to facilitate collaboration with these entities. For example, FAA has entered into formal agreements with the Department of Defense (DOD) and the National Aeronautics and Space Administration (NASA) on obtaining appropriate safety data and coordinating research and development, respectively. FAA has also involved industry stakeholders and academia in the development of standards and research for UAS operations. FAA recently created the UAS Integration Office, within FAA, to coordinate all intra-agency UAS efforts and provide organizational leadership. Continued collaboration among UAS stakeholders will be critical to minimizing duplication of research and addressing implementation obstacles. While FAA has made progress toward meeting the 2012 Act's requirements, as of January 2013, it has missed several of its deadlines. FAA continues to face challenges, with many of its efforts still in process. For example, the establishment of six test ranges for UAS operations, as required by the 2012 Act, is being delayed due to privacy concerns. Meeting the 2012 Act's requirements moving forward will require continued collaboration and significant work for FAA. In September 2012, GAO recommended that FAA incorporate mechanisms in its planning that allow for regular monitoring to assess its progress. Such mechanisms can help FAA identify what has been achieved and what remains to be done. Research and development efforts are under way to mitigate obstacles to safe and routine integration of UAS into the national airspace. However, these research and development efforts cannot be completed and validated without safety, reliability, and performance standards, which have not yet been developed because of data limitations. GAO previously reported that FAA has not utilized the operational data it already possesses, such as data provided by the DOD.

In the 1980s NWS began a nationwide modernization program to upgrade observing systems such as satellites and radars, and design and develop advanced computer workstations for forecasters. The goals of the modernization are to achieve more uniform weather services across the nation, improve forecasting, provide better detection and prediction of severe weather and flooding, permit more cost-effective operations through staff and office reductions, and achieve higher productivity. For example, NWS plans to reorganize its field office structure from 256 offices (52 Weather Service Forecast Offices and 204 Weather Service Offices), to 121. As of February 1999, NWS officials told us that 132 offices have been closed. NWS' system modernization includes four major systems development programs, which are expected to collectively cost about $4.5 billion. I would like to briefly describe each. Next Generation Weather Radar (NEXRAD). This is a program to acquire 166 Doppler radars. Largely deployed, these radars have helped NWS increase the accuracy and timeliness of warnings for severe thunderstorms, tornadoes, and other hazardous weather events. The reported cost of this program is just under $1.5 billion. Next Generation Geostationary Operational Environmental Satellite (GOES-Next). This is a program to acquire, launch, and control five geostationary satellites, GOES-I through GOES-M, which assist in the mission of identifying and tracking severe weather events, such as hurricanes. The first satellite in the current series was launched in 1994 and the fifth is scheduled for launch in 2002. The total cost for these five satellites, including launch services and ground systems, is estimated to be just under $2 billion. Automated Surface Observing System (ASOS). This is a program to automate and enhance methods for collecting, processing, displaying, and transmitting surface weather conditions, such as temperature and precipitation. The system is planned for installation at 314 NWS locations. Estimated costs for the ASOS Program are about $350 million, which includes the NWS units and another 679 units for the Federal Aviation Administration and the Department of Defense. Advanced Weather Interactive Processing System (AWIPS). This program integrates, for the first time, satellite, radar, and other data to support weather forecaster decision-making and communications; it is the linchpin of the NWS modernization. AWIPS, which was originally scheduled to be developed incrementally in a series of six modules, or builds, is currently set to be deployed to 152 locations after the fourth build by the end of June 1999. In 1995 we designated the NWS modernization a high-risk area for the federal government because of its estimated $4.5 billion cost, its complexity, its criticality to NWS' mission of helping to protect life and property through early forecasting and warnings of potentially dangerous weather, and its past problems--documented in several of our reports. Our 1997 high-risk series reported that although the development and deployment of the observing systems associated with the modernization were nearing completion, unresolved issues remained. These concerned the systems' operational effectiveness and efficient maintenance. For example, new radars were not always up and running when severe weather threatened, and ground-based sensors fell short of user expectations, particularly during active weather. We recommended that NWS correct shortfalls in radar performance, and define and prioritize all ground-based sensor corrections according to user needs. Some of our radar and ground-based sensor performance concerns were addressed, while others remain. We recently reported that a NEXRAD unit in southern California failed to consistently meet NWS' own NEXRAD availability requirement, and recommended that the Weather Service correct the problem such that the radar meets availability requirements. NWS agreed, and has several activities planned to bring about such improvement. While there have been specific performance problems, NWS reports that the new radars and satellites overall have enabled it to generate better data and greatly improved forecasts and warnings. We continue to view the NWS modernization as a high-risk area, however, for two primary reasons: (1) NWS lacks an overall architecture to guide systems development and (2) the final piece of the modernization--AWIPS (the forecaster workstations that will integrate weather data from NEXRAD, GOES-Next, and ASOS)--has not yet been deployed. At this point I would like to discuss these issues in more detail. A systems architecture is an essential tool for guiding effective and efficient systems development and evolution. We initially reported in 1994 that the NWS modernization needed such an overall technical blueprint; NWS agrees--and is currently working on one. Until such an architecture is developed and enforced, the modernization will continue to be subject to higher costs and reduced performance. This is an important point as component systems continue to evolve to meet additional demands and take advantage of improved technology. The Assistant Administrator for Weather Services shares this view, and said recently that NWS plans to intensify its efforts to develop a systems architecture. Until AWIPS is fully deployed and functioning properly, NWS will not be able to take full advantage of the $4.5 billion total investment it has made in the modernization. Over the past several years, we have reported that AWIPS has encountered delays and cost increases due to design problems and management shortcomings and have made several recommendations to improve management of this critical component of the modernization. NWS has acted on most of our recommendations. I would like to now update you on AWIPS' cost, schedule, software development, and maintenance. The cost to develop AWIPS was estimated at $350 million in 1985; a decade later, that figure had risen to $525 million. However, in testimony and a report issued in 1996, we pointed out the inaccuracy of this $525 million estimate due to the omission of several cost factors, including known contract increases. The Department of Commerce later committed to a $550 million funding cap. Yet as we testified in April 1997, it would prove extremely difficult for NOAA to develop and deploy AWIPS within the $550 million cap if any problems were encountered. Given the size and complexity of the development--and recognizing that even managed risks can turn into real problems--we testified that such problems were likely to occur and that costs would likely exceed $550 million. In accordance with a recommendation we made in 1996, the department contracted for an independent cost estimate of AWIPS because of the uncertainty about whether it could be delivered within the $550 million cap given the increased software development expenses. According to the assessment dated February 2, 1998, the likely cost to complete AWIPS through its final build--build 6--was $618 million. In March 1998, we reported that although AWIPS was planned for full deployment through build 6 in 1999--at 152 locations nationwide--that schedule is now in doubt. The latest schedule calls only for build 4-- actually build 4.2--to be completed in June, within the $550 million cap. Also as we testified last year, completion dates for builds 5 and 6 were uncertain because NWS wanted to ensure that requirements for those modules were not extraneous to mission needs, in order to minimize future cost increases. This reflects a recommendation we made in 1996 for all AWIPS builds. In August 1998, an independent review team reported that build 5 requirements are essential to NWS' core mission and that the cost to complete should range from an additional $20 to $25 million above the $550 million cap. The team concluded that build 6 requirements should not be pursued, however, because they "resemble capabilities desired, rather than requirements." According to the AWIPS program manager, deployment of build 4.2 will result in improved forecasts and warnings, a reduction of 106 staff, and the decommissioning of the current Automation of Field Operations and Services (AFOS) system. The program manager added that build 5 will be pursued in order to realize expected further improvements in weather forecasts and warnings, a reduction of an additional 69 staff, and the decommissioning of the NEXRAD workstations. Schedules for build 5 have not yet been developed. To help ensure that build 4.2 will be delivered within the cap, the Assistant Administrator for Weather Services has contracted with an independent accounting firm to verify program expenditures. The most critical risk factors underlying questions about AWIPS' future relate to software development. We have frequently reported on this and made several recommendations to improve AWIPS' software development processes. Software quality is governed largely by the quality of the processes used to develop it; however, NWS' efforts to develop AWIPS software have lacked defined development processes. Such processes are all the more essential because of NWS' increased use of software code developed internally at NOAA's Forecast Systems Laboratory (FSL) in Boulder, Colorado--a research and development facility that primarily develops prototype systems. This software code has not been developed according to the rigorous processes commonly used to develop production- quality code. Failure to adhere to these processes may result in unstable software that will continue to cause cost increases and schedule delays. The cost assessment delivered in February 1998 also found risk inherent in the development of builds 4 through 6 because of the transitioning of FSL- developed software to AWIPS and the uncertainty surrounding requirements for these builds. NWS officials have acknowledged these software development process weaknesses, and have told us that they continue to strengthen these processes. For example, NWS reports that all AWIPS software, both that developed by the government and the contractor, is being controlled under a common configuration management process. Another risk area concerns the network control facility, which provides the ability to monitor and maintain AWIPS sites across the country from a single location. As we testified last year, through build 3, AWIPS was still experiencing difficulty with the central location's ability to detect and respond to problems. We further testified that since these problems concerned only a limited number of sites that as more sites come on line, problems can be expected to increase. NWS officials have acknowledged that the poor performance of the network control facility continues to be a prime concern, have sought the advice of external consultants, and have initiated a number of actions to improve performance of this facility. Finally, a critical risk area is whether the AWIPS builds--and, indeed, all modernization components--will be Year 2000 compliant. AWIPS to date is not Year 2000 compliant. Build 4.2--set for completion this June--is intended to make all AWIPS applications Year 2000 compliant. In the event it is late, NWS has renovated its current system, Automation of Field Operations and Services, to be ready as a potential backup. Yet even if Year 2000 compliance ceases to be an issue with build 4.2, NWS' companion modernization systems will need to be compliant because of the amount of data they exchange. NWS reports that five of the six mission-critical systems that interface with AWIPS are already Year 2000 compliant, on the basis of individual systems tests. The remaining system is scheduled to be compliant by March 31, 1999, according to the Department of Commerce's February 1999 Quarterly Year 2000 Progress Report to the Office of Management and Budget. To ensure that these mission-critical systems can reliably exchange data with other systems and that they are protected from errors that can be introduced by external systems, NWS has begun to perform end-to-end testing. These tests include multiple Weather Service systems working together and critical interfaces with the Department of Defense and the Federal Aviation Administration. NWS plans to continue to conduct this end-to-end testing through March of this year. The final report on the results of these tests is scheduled to be issued this May. We suggest that NWS consider conducting additional end-to-end testing after the final version of AWIPS is delivered, which is currently scheduled for this June. Currently, NWS is using a prior version of AWIPS in its end-to- end testing--a version that continues to be modified as AWIPS' system- level testing progresses. Testing with the final version of AWIPS will help to ensure that the production system that will be running in the year 2000 will work with its interrelated systems. To reduce the risk and potential impact of Year 2000-induced information systems failures on the Weather Service's core business processes, it is critical that NWS have contingency plans in place that will help ensure continuity of operations through the turn of the century. Without such plans, NWS will not have well-defined processes to follow in the event of failures. NWS depends on data provided by other federal agencies as well as on services provided by the public infrastructure (e.g., power, water, voice and data telecommunications). One weak link anywhere in this chain of critical dependencies could cause major disruption to NWS operations. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes. According to NWS' Year 2000 program manager, the Weather Service has begun drafting contingency plans for three core business processes: those that (1) observe weather data, (2) produce forecasts and warnings, and (3) disseminate data. It is essential that NWS develop these business continuity and contingency plans expeditiously, and test these plans to ensure that they are capable of providing the level of support needed to allow continued functioning of NWS' core business processes in the event of failure. As noted in our business continuity and contingency guide, another key element of such a plan is the development of a zero day or day one risk reduction strategy and, more generally, procedures for the period between December 1999 and early January 2000. Key aspects of this strategy can include the implementation of (1) an integrated control center, whose purposes include the internal dissemination of critical data and problem management and (2) a timeline that details the hours in which certain events will occur (such as when backup generators will be started) during the late December and early January rollover period. To date, NWS has no such strategy. We suggest that the development of such a risk reduction strategy be undertaken. In conclusion, NWS has made progress on the development and operational testing of the forecaster workstations and its Year 2000 testing and contingency planning. However, cost, schedule, and technical risks associated with the workstations continue to be concerns. Further, the results of NWS' Year 2000 end-to-end testing and business continuity and contingency plans are expected to be delivered soon. NOAA has an aging in-house fleet of 15 ships that are used to support its programs in fisheries research, oceanographic research, and hydrographic charting and mapping. Most of NOAA's ships are past their 30-year life expectancies and many of them are costly and inefficient to operate and maintain and lack the latest state-of-the-art technology. NOAA's ships are managed and operated by a NOAA Corps of about 240 uniformed service commissioned officers who, like the Public Health Service Corps, perform civilian rather than military functions but are covered by a military-like pay and benefits system. For more than a decade, congressional committees, public and private sector advisory groups, the National Performance Review, the Commerce Office of Inspector General (OIG), and our office have urged NOAA to aggressively pursue cost-effective alternatives to its in-house fleet of ships. We have also reported and testified on issues relating to NOAA's Commissioned Corps that manages and operates the in-house fleet of ships. We reported on NOAA's fleet operations and fleet modernization needs in 1986 and again in 1994 and summarized our earlier work, the Commerce OIG's work, and the Department of Commerce's corrective actions in summary reports in January 1998 and January 1999. As part of our recent special performance and accountability series of reports, we identified the NOAA fleet as one of four major performance and management issues confronting the Department of Commerce. As early as 1986 we reported that NOAA needed to develop more definitive information on private ships' availability, capability, and costs before taking any action to deactivate NOAA's ships. In 1994, we reported that NOAA (1) lacked the financial and operational data it needed to adequately assess whether chartered and contracted ships could cost effectively meet the needs of its programs and (2) had no assurance that its fleet modernization plan represented the most cost effective means of meeting future program requirements. Consequently, we recommended that NOAA take several actions to ensure that all viable and cost-effective options for accomplishing its program missions are considered in making decisions on future fleet modernization. The Commerce OIG has also reported and testified several times on the NOAA fleet modernization issue, identified the fleet as one of the top 10 management problems facing the Department of Commerce in April 1997, January 1998, and again in December 1998, and continues to believe that NOAA could and should be doing more to pursue cost-effective alternatives to its in-house fleet of ships for acquiring marine data. Following reports by us, the Commerce OIG, and others, the Department of Commerce initially identified the NOAA fleet as a material weakness in its annual Federal Managers' Financial Integrity Act (FMFIA) report for fiscal year 1990. It remains a material weakness today. Since 1990, NOAA has developed several fleet replacement and modernization plans that call for investments of hundreds of millions of dollars to upgrade or replace these ships, and each has been criticized by the Commerce OIG for not pursuing alternative approaches strongly enough. For example, in a 1996 program evaluation report on NOAA's $1 billion 1995 fleet modernization plan, the OIG recommended that NOAA terminate its fleet modernization efforts; cease investing in its ships; immediately begin to decommission, sell, or transfer them; and contract for the required data or ship services. In response to these criticisms, NOAA now says that it has taken steps to improve the cost efficiency of its fleet and significantly increased its outsourcing for these services from about 15 percent in 1990 to over 40 percent today. According to NOAA, for example, it has removed seven ships from service and brought one new and two converted Navy ships into service since 1990, now outsources for about 46 percent of its research and survey needs, and expects to further increase its use of outsourcing to about 50 percent over the next 10 years. Although NOAA apparently has made progress in reducing the costs of its fleet and outsourcing for more of its research and data needs, NOAA continues to rely heavily on its in-house fleet and still plans to replace or upgrade some of these ships. In this regard, the President's budget for fiscal year 2000 proposes $52 million for construction of a new fisheries research ship and indicates that NOAA plans to spend a total of $185 million for four new replacement ships over the 5-year period ending in fiscal year 2004--$52 million in 2000, $51 million in 2001, $40 million in 2002, $40 million in 2003, and $2 million in 2004. We have not had an opportunity to review the latest studies of NOAA's fleet modernization efforts or NOAA's acquisition plan for its fisheries research mission. Thus, we do not know whether or not NOAA's proposed replacement ships are the most cost- effective alternative currently available for meeting these fisheries research needs. In addition to its proposed acquisitions, NOAA also continues to repair and upgrade its aging fleet of existing ships. Since 1990, it has repaired and upgraded seven of its existing ships and plans to repair and upgrade two more in 1999. According to the President's recent budget requests, NOAA spent $12 million in 1996 and $13 million in 1997 to modernize, convert, and replace its existing ships. Also, it spent $21 million on fleet maintenance and planning in 1998 and expects to spend $13 million in 1999 and $9 million in 2000. The question of the viability of the NOAA fleet is entwined with the issue of the NOAA Corps, which operates the fleet. In 1995, the National Performance Review, noting that the NOAA Corps was the smallest uniformed service and that the fleet it commanded was obsolete, recommended that the NOAA Corps be gradually reduced in numbers and eventually eliminated. We reported in October 1996 that the NOAA Corps generally does not meet the criteria and principles cited by the Department of Defense for a military compensation system. We also noted that other agencies, such as the Navy, the Environmental Protection Agency (EPA), and the Federal Emergency Management Agency (FEMA), use federal civilian employees or contractors to carry out duties similar to the functions that NOAA assigns to the Corps. Commerce developed a plan and legislative proposal to "disestablish" or civilianize the NOAA Corps in 1997, but the Congress did not adopt this proposal. According to NOAA and to the Department of Commerce's annual performance plans for fiscal years 1999 and 2000 under the Results Act, the NOAA Corps has been downsized from over 400 officers in fiscal year 1994 to about 240 at the beginning of fiscal year 1999, achieving gross annual cost savings of at least $6 million. In June 1998, NOAA announced a new restructuring plan for the NOAA Corps. NOAA's plan focused on the need for a NOAA Commissioned Corps of about 240 officers. NOAA's June 1998 restructuring plan also called for a new civilian director of the NOAA Corps and a new recruiting program. However, the Congress had other ideas. The Omnibus Appropriations Act for fiscal year 1999 set the number of NOAA Corps officers at 250. Subsequently, the Governing International Fishery Agreement Act (Public Law 105-384, approved November 13, 1998) made other changes in NOAA's proposed restructuring plan. This act authorized a NOAA Corps of at least 264 but not more than 299 commissioned officers for fiscal years 1999 through 2003, requires that a uniformed flag officer be the NOAA Corps' operational chief, and directed the Secretary of Commerce to lift the then- existing recruiting freeze on NOAA Corps officers. According to the NOAA Corps, it expects to have about 250 commissioned officers by the end of fiscal year 1999. In summary, NWS faces significant challenges this year--both in deploying the initial version of AWIPS and in addressing the Year 2000 problem. Longer term, NWS still needs to develop an overall systems architecture and to develop AWIPS' build 5 requirements since they are essential to NWS' core mission. In the NOAA fleet area, continuing congressional oversight of NOAA's budget requests for replacement or upgraded ships is needed to ensure that NOAA is pursuing the most cost-effective alternatives for acquiring marine data. This concludes our statement. We 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. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary, VISA and MasterCard credit cards are accepted, also. 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Pursuant to a congressional request, GAO discussed the: (1) status of the National Weather Service (NWS) systems modernization; and (2) most cost-effective alternatives for acquiring the National Oceanic and Atmospheric Administration's (NOAA) marine data. GAO noted that: (1) although NWS is nearing completion of its systems modernization effort, two significant challenges face it this year: (a) deploying the final system of modernization; and (b) ensuring that all of its mission-critical systems are year 2000 compliant; (2) NWS has made progress on both fronts; (3) in the NOAA fleet area, NOAA now outsources for more of its research and data needs but plans to spend $185 million over the next five years to acquire four new replacement NOAA fisheries research ships; and (4) thus, GAO believes that continued congressional oversight of this area, as well as NOAA's budget requests for replacement or upgraded ships, is needed to ensure that NOAA is pursuing the most cost-effective alternatives for acquiring marine data.

Physician practices that charge membership or retainer fees and provide enhanced services or amenities are referred to as concierge care or retainer-based medicine. The origins of this practice approach are often traced to a medical practice founded in Seattle, Washington, in 1996. Physicians in this practice provide comprehensive primary care to no more than 100 patients each and currently charge annual retainer fees of $13,000 for individuals. These physicians do not bill any form of patient health insurance. As more physicians have begun concierge practices, concierge care has become more diverse, comprising physicians who bill patient insurance, charge lower membership fees, and see more patients than the original Seattle practice. The American Medical Association (AMA) has described concierge care as one of many options that patients and physicians are free to pursue. AMA in 2003 adopted ethics guidelines for physicians who have concierge care contracts--which AMA calls retainer contracts--with their patients. These guidelines specify, for example, that physicians should facilitate the transition to new physicians for patients who choose not to join their concierge practices and that they must observe relevant laws, rules, and contracts. The Medicare program was established by title XVIII of the Social Security Act, which governs how physicians bill for services that the program covers. Limits on what physicians may charge their Medicare patients depend on (1) the relationship between the physician and the Medicare program and (2) the type of service provided. Physicians who provide services to Medicare beneficiaries may choose one of three ways to relate to the program: participating, nonparticipating, or opted out. Participating: Participating physicians agree to accept Medicare's fee schedule amount as payment in full for all covered services they provide to beneficiaries. In accordance with the Medicare participation agreement, these physicians receive reimbursement directly from the Medicare program and agree to charge beneficiaries only for any applicable deductible or coinsurance. More than 90 percent of the physicians and others who billed Medicare agreed to participate in Medicare in 2004. Nonparticipating: Nonparticipating physicians do not agree to accept the Medicare fee schedule amount paid to participating physicians as payment in full for all covered services they provide to beneficiaries. They are still subject to limits on what they may charge, however, and those limits depend on whether they seek reimbursement directly from Medicare. When a nonparticipating physician files a claim to be reimbursed directly from Medicare, he or she must accept the Medicare fee schedule amount for nonparticipating physicians, which is 95 percent of the fee schedule amount for participating physicians, as payment in full and may charge the beneficiary only for any applicable Medicare coinsurance or deductible. When a nonparticipating physician does not request reimbursement directly from Medicare, he or she may charge the Medicare beneficiary up to 115 percent of the fee schedule amount for nonparticipating physicians. Opted-out: Physicians who opt out of Medicare are not subject to any limits on what they may charge their Medicare beneficiary patients, even for services that Medicare would otherwise cover. Physicians who opt out of Medicare must agree not to submit for 2 years any claims for reimbursement for any of the services they provide to Medicare beneficiaries. Contracts between opted-out physicians and their beneficiary patients allow them to make their own financial arrangements for services that would otherwise be covered by Medicare, effectively taking those services outside the program. These contracts must be in writing and they must clearly state that the beneficiary also agrees not to submit claims to Medicare and assumes financial responsibility for all services provided by that physician. In addition to a physician's Medicare participation status, the type of service provided also determines whether limits apply to physician charges. Physicians and beneficiaries are free to make private financial arrangements for the provision of services that Medicare does not cover. General standard for Medicare coverage: Medicare law states that, to be covered, services must be reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member. The scope of coverage and the exact type of service that may be reimbursed depend on the circumstances of each case. This medical necessity standard can result in situations where the same service--for example, a comprehensive office visit--is considered medically necessary and reimbursable by Medicare in some circumstances but not others. Specific inclusion in Medicare coverage: Medicare law also establishes coverage for certain specific services. For example, Medicare covers an initial preventive physical examination for beneficiaries who become eligible for Medicare on or after January 1, 2005. Other examples of specific preventive benefits established by statute include immunizations against pneumonia, hepatitis B, and influenza and periodic screening tests for early detection of certain cancers. Specific exclusion from Medicare coverage: Medicare law specifically excludes certain items or services--for example, personal comfort items, purely cosmetic surgery, hearing aids, and routine physical checkups except for the initial preventive examination for newly eligible beneficiaries. Table 1 summarizes the limits on physician charges depending on their Medicare participation status and the type of service provided. Physicians who impose charges on beneficiaries beyond the Medicare limits may be subject to civil monetary penalties. The Secretary of HHS has delegated enforcement of Medicare limits to two different entities within HHS. CMS, which administers the Medicare program, has enforcement authority over the limits that apply to nonparticipating physicians. HHS OIG has enforcement authority over participating physicians' compliance with the terms of the participation agreement. The Medicare law's limits on physician charges protect beneficiaries from additional charges for services they are entitled to receive under Medicare. The law does not, however, provide that a beneficiary has the right to receive services from any particular physician. Physicians are free to choose how they will interact with the Medicare program. They may decide to close their practices to new Medicare patients or decline to treat any Medicare beneficiaries at all. Concierge care is practiced by a small number of physicians, located primarily in urban areas on the East and West Coasts. Although nearly all of the concierge physicians who responded to our survey reported practicing primary care, they differed in many of the characteristics of practice design, including the annual membership fee charged, number of patients treated, features offered, whether they billed health insurance, and their relationship to the Medicare program. Concierge physicians are few in number and located primarily in urban areas on the East and West Coasts. Since the first Seattle practice was founded in the mid-1990s, the number of concierge physicians has been rising but remains small. We were able to locate 146 concierge physicians in the United States as of 2004--a small number compared with the more than 470,000 physicians who regularly submitted claims to Medicare in 2003. The 146 concierge physicians we identified practiced in 25 states, with the greatest numbers in metropolitan areas on the East and West Coasts. California had the highest number, with 26 concierge physicians, followed by Florida with 22, Washington with 21, and Massachusetts with 17. We identified 1 to 8 concierge physicians in 21 other states, though most of these other states had 5 or fewer. All but 2 of the concierge physicians we located practiced in metropolitan areas. We found the highest numbers of concierge physicians in the metropolitan statistical areas (MSA) of Seattle (19); Boston (17); and West Palm Beach-Boca Raton, Florida (13). Figure 1 presents the locations of 144 concierge physicians we identified who practiced in MSAs throughout the nation. The number of physicians practicing concierge care has increased in recent years. Among the 112 concierge physicians who responded to our survey, the cumulative total number practicing concierge care has increased by more than 10 times in the past 5 years (see fig. 2). About two-thirds of the responding physicians reported that they began to practice concierge care in 2003 or later. The number of responding physicians starting to practice concierge care rose each year after 2000, except in 2004, although we did not include physicians who began practicing concierge care after October 2004. Nearly all of the physicians who responded to our survey reported practicing primary care and most were not new to medical practice. Physicians reported practicing the primary care disciplines of internal medicine (about three-fourths of respondents) and family practice (about one-fourth of respondents). Survey respondents reported being in various stages in their medical careers, from relatively new to practice to decades of experience. More than two-thirds reported having been in medical practice for 15 years or more. The average length of time in medical practice was 19 years, and about one-fourth of the respondents reported being in practice for 25 years or more. See appendix II for additional information provided by survey respondents. Concierge physicians responding to our survey reported a variety of practice characteristics. These included the amount charged to be a concierge patient, practice size, features offered, whether they billed patient health insurance, and their relationship to the Medicare program. The annual membership fee for an individual to join a concierge practice ranged from $60 to $15,000 among the physicians responding to our survey. As shown in figure 3, more than 80 percent of respondents reported annual fees from $500 to $3,999; the most frequently reported annual fee was $1,500. Three-fourths of our respondents reported that they waived the membership fee for some of their concierge patients. About one in eight of these physicians reported waiving the fees for 20 percent or more of their concierge patients. Concierge physicians responding to our survey reported, on average, 491 patients under their care as of October 2004--significantly fewer than the average of 2,716 patients they reported for the year before beginning to practice concierge care. Of the total patients they reported in October 2004, an average of 326 were concierge patients--that is, patients who either paid the membership fee or had the fee waived, and were offered the enhanced services or amenities associated with membership. Nearly two-thirds of responding physicians reported having fewer than 400 concierge patients (see fig. 4). Concierge physicians also reported seeing fewer patients per day: the average number of patients physicians reported seeing on a typical day fell to 10 in October 2004 from 26 in the year before they began practicing concierge care. Many respondents reported that they were still establishing their concierge practices and had set targets for the number of concierge patients in their care. Respondents reported target numbers for concierge patients ranging from 10 to 1,300; the two most frequently reported goals were 300 and 600 concierge patients (reported by 23 and 30 respondents, respectively). About 80 percent of respondents reported that they had not yet reached their target number of concierge patients as of October 2004. About 1 in 2 of the respondents who began concierge care in 2001 or earlier reported having met their goal for the number of concierge patients in their practices, compared with about 1 in 7 of those who reported starting their concierge practices on or after January 1, 2002. Concierge physicians may continue, for various reasons, to treat some nonconcierge patients. Thirty-six, about one-third of survey respondents, reported that their individual practices included some nonconcierge patients, while about two-thirds had practices consisting entirely of concierge patients. Physicians who continued to see nonconcierge patients reported doing so for various reasons: to ensure continuity of care for patients who did not join the concierge practice, to maintain a combined concierge and conventional practice, or to see patients as part of a subspecialty practice. Less frequently reported situations in which respondents reported seeing nonconcierge patients included seeing family members of their concierge patients occasionally as a courtesy or when urgent needs arose, and covering for other doctors who were out of town. The concierge physicians responding to our survey reported offering a variety of features, some of which were offered by nearly all the respondents, others by relatively few (see table 2). The most frequently reported features were same- or next-day appointments for nonurgent care, 24-hour telephone access, and periodic preventive-care physical examinations. When asked to list the most important features of concierge care that were not routinely available to their nonconcierge patients, respondents most frequently cited features related to increased time spent with patients, direct patient access to the physician at any time, same- or next-day appointments, and comprehensive preventive and wellness care. Concierge physicians responding to our survey reported different ways of interacting with patient health insurance and the Medicare program. Eighty-five, approximately three-fourths, of respondents reported that they billed patient health insurance for covered services. Of these 85 physicians, 79 reported they billed Medicare and 6 reported they did not. About one- fourth of the concierge physicians responding to our survey reported that they did not submit any claims to patient health insurance, including Medicare. About three-fourths of our survey respondents reported that they were Medicare participating physicians, and about one-fifth had opted out of Medicare as of October 2004 (see fig. 5). Nationwide, relatively few physicians--approximately 3,000 in 2004--have opted out of the Medicare program. Two principal aspects of concierge care are of interest to the Medicare program and its beneficiaries: its compliance with Medicare requirements and its effect on beneficiary access to physician services. HHS has established general policy on concierge care and alerted physicians to areas of potential noncompliance. Although concierge physicians have followed various strategies to ensure compliance with Medicare requirements, most physicians responding to our survey indicated more HHS guidance would be helpful. Available measures of access to care as of 2004, while not directly addressing concierge care, indicate that Medicare beneficiary access to physician services has been good. The small number of concierge physicians makes it unlikely that the approach has contributed to widespread access problems. HHS has established general policy on concierge care and has alerted physicians to areas of potential noncompliance. Concierge physicians have expressed the need for additional guidance and have taken various steps-- such as structuring their practices in an attempt to avoid associating their membership fees with Medicare-covered services or opting out of Medicare--to avoid compliance problems. CMS outlined its position on concierge care in a March 2002 memorandum to CMS regional offices that CMS officials told us remains current as of June 2005. The memorandum states that physicians may enter into retainer agreements with their patients as long as these agreements do not violate any Medicare requirements. For example, concierge care membership fees may constitute prohibited additional charges if they are for Medicare- covered items or services. If so, a physician who has not opted out of Medicare would be in violation of the limits on what she or he may charge patients who are Medicare beneficiaries. HHS OIG has addressed the consequences of noncompliance with Medicare billing requirements. In March 2004, HHS OIG issued an alert "to remind Medicare participating physicians of the potential liabilities posed by billing Medicare patients for services that are already covered by Medicare." The alert stated that "charging extra fees for already covered services abuses the trust of Medicare patients by making them pay again for services already paid for by Medicare." As an example, the alert referred to a Minnesota physician who paid a settlement and agreed to stop offering personal health care contracts to patients for annual fees of $600. According to HHS OIG, these contracts included at least some services that were already covered and reimbursable by Medicare. The alert advised participating physicians that they could be subject to civil monetary penalties if they requested payment from Medicare beneficiaries for those services in addition to the relevant deductibles and coinsurance charged for these services. In addition, the alert noted that nonparticipating physicians may also be subject to penalties for overcharging beneficiaries for covered services. Unless a concierge physician opts out of Medicare, the question of Medicare coverage is central to whether a concierge care agreement complies with the program's limits on patient charges. HHS OIG's March 2004 alert provided three examples of services offered by the physician in Minnesota: coordination of care with providers, a comprehensive assessment and plan for optimum health, and extra time spent on patient care. HHS OIG did not indicate which, if any, of those three services were already covered by Medicare. The resulting uncertainty, about which features of the Minnesota physician's concierge agreement formed the basis for HHS OIG's allegation that he violated the Medicare program's prohibition against charging beneficiaries more than the applicable deductible and coinsurance, generated concern among some concierge physicians. According to HHS OIG officials, HHS OIG has not issued more detailed guidance on concierge care because its role in this area is to carry out specific delegated enforcement authorities, not to make policy. HHS OIG addresses each situation in its specific context. Physicians with questions about their own concierge care agreements may obtain guidance specific to them from HHS by requesting an advisory opinion. HHS OIG's Industry Guidance Branch issues advisory opinions on matters that fall within its enforcement authority. It covers provisions of Medicare law that prohibit knowingly presenting a beneficiary with a request for payment in violation of a physician's participation agreement. Consequently, any participating physician who operates or is considering starting a concierge practice could request an advisory opinion. Advisory opinions are legally binding on HHS and the requesting party as long as the arrangement is consistent with the facts provided. The process involves a written request that meets certain requirements, plus a fee. Advisory opinions are not available for hypothetical situations, "model" situations, or general questions of interpretation. Officials with HHS OIG reported that as of May 2005, the Industry Guidance Branch had received very few inquiries regarding advisory opinions about concierge care agreements, and no opinions have been issued on this subject. Most of the physicians who responded to our survey indicated that more guidance from HHS on how Medicare requirements might affect concierge care is needed. Although about one-fourth of respondents said that the information available from HHS was clear and sufficient, more than half reported that it was not. Of those who reported that the guidance was not clear and sufficient, about one-third stated that information was available from other sources, including private attorneys, the Society for Innovative Medical Practice Design, and concierge care consultants (see table 3). Medicare compliance is an important consideration in how concierge physicians set up their practices. For example, concierge physicans should avoid including services covered by Medicare in their concierge agreements to ensure that no additional charges are associated with those services. Different strategies have been undertaken to accomplish this. One such strategy emphasizes the convenience and availability of concierge physicians as the primary benefit of membership. Another strategy is to focus on preventive care, linking the membership payment only to screening that Medicare does not cover. Some concierge physicians opt out of Medicare, thus avoiding potential compliance problems; opting out requires physicians to forgo all Medicare reimbursement for 2 years. Most of the concierge physicians responding to our survey reported having patients who were Medicare beneficiaries; however, the numbers of beneficiary patients they reported as part of their concierge and previous nonconcierge practices are very small compared to the more than 40 million Medicare beneficiaries. Surveys and national sources of information on beneficiary access to care do not address the impact of concierge care directly. In the absence of direct measures of the impact of concierge care on Medicare beneficiaries' access to physician services, we reviewed available nationwide data and other indicators about beneficiaries' experiences overall. These sources showed that overall access to physician services has not changed substantially in recent years. Estimates provided by 105 of the respondents indicated that about two- thirds of the estimated 19,400 Medicare beneficiaries who were patients of these physicians in October 2004 were considered concierge patients. The rest were nonconcierge patients who were neither charged a fee nor offered enhanced services. Physicians who continued to see nonconcierge patients reported doing so for various reasons, including to ensure continuity of care for individuals who had not yet found a new physician and to maintain a practice consisting of both concierge and nonconcierge patients. On average, Medicare beneficiaries represented about 35 percent of the total number of patients--concierge and nonconcierge--that responding concierge physicians reported having in their care as of October 2004. Eight of the 105 physicians who provided this information reported having no Medicare beneficiaries in their practices at all; 36 reported treating some, but fewer than 100 Medicare beneficiaries among their patients; and 12 reported having 400 or more Medicare beneficiaries under their care (see fig. 6). Concierge physicians who responded to our survey reported that, on average, Medicare beneficiaries in their previous nonconcierge practices joined their concierge practices in about the same proportion as their patients overall. When physicians begin practicing concierge care, existing patients may choose not to become concierge patients. Patient counts provided by responding physicians indicate that, on average, Medicare and non-Medicare patients who were under their care before they began concierge care chose to join as concierge patients in roughly similar proportions. Table 4 shows the average numbers of Medicare and non-Medicare patients responding physicians reported were in their practices before and after their conversion to concierge care. The numbers of beneficiaries that responding concierge physicians reported in their practices are relatively small--for example, the total number of Medicare beneficiaries that 88 responding physicians reported treating before conversion to concierge care was fewer than 100,000--compared to the nation's more than 40 million Medicare beneficiaries. Respondents reported engaging in a variety of activities to help Medicare beneficiaries choosing not to join the physician's concierge practice find new physicians. These activities included designating a staff person to help with transition questions, referring patients to other physicians within a group practice, calling new physicians to discuss a patient's medical history, and remaining available to treat all patients until they had found a new primary care physician. Additional activities reported include bringing a new physician into the practice to take on the concierge physician's previous patients and speaking individually with each patient. We did not contact Medicare beneficiary patients of the concierge physicians in our survey to determine how many of them had sought or found new physicians. See appendix II for additional details on actions physicians reported taking to help Medicare patients who did not join their concierge practices to find new physicians. The number of concierge physicians, and the number of Medicare beneficiaries the physicians reported in their previous nonconcierge practices, are relatively small, and therefore national surveys of samples of Medicare beneficiaries are not likely to include many beneficiaries who come into contact with concierge care. In the absence of data to directly assess the impact of concierge care on Medicare beneficiaries' access, however, national surveys can provide general information about the availability of physicians and beneficiary access to care. Overall, national surveys showed that Medicare beneficiary access to physician services has been good, in some cases better than access for individuals with private health insurance. Surveys targeting both Medicare beneficiaries and physicians revealed that overall access to physician services has not changed substantially in recent years. Most beneficiaries surveyed reported that they have not had a problem finding a primary care physician. Of those who did report a problem, only a small percentage attributed their difficulty to physicians' refusing to take new Medicare patients. Most beneficiaries attributed problems to transportation barriers or their difficulty finding a physician they liked, not to a shortage of primary care physicians who accepted Medicare. Of physicians surveyed, most reported accepting at least some new Medicare patients. Analysis done by the Medicare Payment Advisory Commission of Medicare claims data also revealed that the number of physicians who treated Medicare patients grew at a more rapid pace than the Medicare beneficiary population from 1999 to 2003. Results from our review of Medicare claims data from April 2000 and April 2002 indicated increases throughout the country in both the percentage of beneficiaries who received physician services and the number of services provided to beneficiaries who were treated. Physician supply data from the Seattle, Boston, and Southeast Florida metropolitan areas, where we found concierge care is relatively prominent, suggested that physicians there were relatively plentiful. The ratio of physicians to overall population in each of these metropolitan areas exceeded the nationwide average for all metropolitan areas in 2001. Because concierge physicians treat fewer patients than do physicians in conventional practices, a community needs other available physicians to take on Medicare beneficiaries who choose not to join a concierge practice. Even in communities where the concierge physician population was largest, however, the number of concierge physicians we identified was small compared with the physician population as a whole. CMS officials informed us that CMS has not established a special tracking system for beneficiary complaints about concierge care because the practice is not sufficiently widespread to raise concerns about access to care. Similarly, officials with call centers for 1-800-MEDICARE and CMS contractors handling beneficiary inquiries and complaints reported that they have received a small number of calls from beneficiaries about concierge care. Because of the low volume of calls on this subject, the majority of these call centers do not have tracking codes for responses to calls about concierge care. Of the 15 CMS contractors who process claims for physician services and responded to our inquiry, only 1 reported establishing a code to track concierge care inquiries. This contractor established the tracking code in response to our inquiry about concierge care in February 2005. As of April 2005, none of this contractor's call centers reported receiving any beneficiary calls about concierge care. Because of the relatively high number of concierge physicians in the Seattle metropolitan area, CMS's Seattle regional office has been following concierge care, but so far it has not identified an impact in Medicare beneficiaries' access to care. The Seattle office's efforts are part of an agencywide effort to monitor beneficiary access to care through reports in the media and from the CMS divisions that interact with beneficiaries. According to CMS officials in the agency's Seattle regional office, that office has received a small number of calls about concierge care from physicians and beneficiaries, mainly asking whether concierge care is permitted under Medicare law. Seattle regional office officials said they respond in accordance with CMS guidelines: they do not review specific concierge care agreements but help beneficiaries by providing a list of local physicians who participate in Medicare. The CMS Seattle regional office has not found indications that beneficiaries who choose not to pay their physician's membership fees have had problems locating new primary care physicians. We did not contact Medicare beneficiaries who were patients of physicians who converted to concierge care to determine how many of them had sought or found new physicians. We did, however, contact organizations that Medicare beneficiaries might call with problems or concerns, including AARP and the Medicare Rights Center. Like CMS, officials with these organizations reported receiving a few calls from beneficiaries about concierge care, and none reported complaints from beneficiaries about finding a physician or about access to services because of concierge care. Officials with these groups also reported that they have not developed a formal system to track the issue. According to officials from these organizations, calls from beneficiaries about concierge care are usually requests for help interpreting the letters from their physicians explaining the physicians' conversion to concierge care. Although the number of physicians practicing concierge care has grown in recent years, the total number remains very small. Available measures of Medicare beneficiaries' overall access to care, while not directly addressing concierge care, indicate widespread availability of physicians to treat them. The small number of concierge physicians at the time of our review, along with information from available measures of access to services, suggests that concierge care does not present a systemic access problem for Medicare beneficiaries at this time. We provided a draft of this report for comment to HHS. In its comments, HHS agreed that concierge care has had a minimal impact on beneficiary access to physician services at this time. HHS noted, however, that the agency is interested in developments in concierge care and will continue to follow this area and to evaluate whether any further steps are indicated. See appendix III for HHS's written comments. HHS also provided technical comments, which we incorporated where appropriate. We also provided a draft to the Society for Innovative Medical Practice Design, formerly the American Society of Concierge Physicians, which had no comments. We are sending copies of this report to the Secretary of HHS, the Inspector General of HHS, the Administrator of CMS, and appropriate congressional committees. We will also provide copies to others upon request. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-7119 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To obtain information on the characteristics of concierge care, we surveyed concierge physicians about their practices and the types of services and financial arrangements they offer. Because no comprehensive directory of concierge physicians was available, we compiled our own list of concierge physicians to survey. We focused our survey on physicians who, as of October 2004, (1) had established a direct financial relationship with patients in the form of a membership or retainer fee and (2) provided enhanced services or amenities, such as same-day appointments or preventive services not covered by patient health insurance. We identified concierge physicians through a variety of methods, including a nationwide literature search, telephone interviews, and referrals from other concierge physicians. With the assistance of a contractor, we compiled an initial list of potential survey participants, contacted them to confirm that they met the criteria for inclusion in our survey, and requested referrals to additional concierge physicians. We used a variety of sources to establish our initial list of potential survey participants, including a nationwide Internet search of articles in newspapers, business journals, and medical publications; attendance at the first annual meeting of the American Society of Concierge Physicians (now known as the Society for Innovative Medical Practice Design); and a list of physicians affiliated with a consulting firm that helps physicians establish and maintain concierge practices. This process yielded a final mailing list of 187 individuals. We mailed the questionnaires in November 2004, after pretesting it with concierge physicians and incorporating suggestions from several reviewers familiar with concierge care; we followed up with nonrespondents during December 2004 and January 2005. Two questionnaires were returned as undeliverable; we removed those names from our total count of potential concierge physicians. The total we used to calculate the response rate for our survey was therefore 185. We received responses to our survey from 129 physicians, yielding an overall response rate of 70 percent. Of the respondents, 112 physicians confirmed that they practiced concierge care--that is, they reported that they charged a retainer or membership fee for enhanced services or amenities--as of October 2004. We analyzed only the information provided by these 112 physicians. Because these 112 respondents were not randomly sampled from a larger population of known concierge physicians, the information they provided cannot be projected to any other concierge physicians. We did not attempt to verify the accuracy of their responses. In addition to the 112 physicians practicing concierge care in October 2004 and responding to our survey, we confirmed--through, for example, telephone interviews conducted by us or our contractor--the concierge status of an additional 34 physicians who did not return our questionnaire. This process yielded a total of 146 confirmed concierge physicians. To analyze the geographic practice locations of these 146 physicians, we assigned the physicians' zip codes to larger geographic units called metropolitan statistical areas (MSA) or primary metropolitan statistical areas (PMSA), as defined in 1999 by the Office of Management and Budget. To review the aspects of concierge care of interest to the Medicare program and its beneficiaries, we reviewed relevant provisions of Medicare law and documents from the Department of Health and Human Services (HHS), including Centers for Medicare & Medicaid Services (CMS) policy manuals and internal memorandums, information posted on the CMS Web site, an alert published by the HHS Office of Inspector General (OIG), and correspondence between interested parties and HHS officials regarding concierge care. We also interviewed CMS officials at CMS headquarters and in the Seattle regional office, officials with HHS OIG, and concierge physicians and their representatives and, in our survey, asked concierge physicians for their views on the guidance available from HHS on concierge care. To assess what is known about how concierge care might affect Medicare beneficiary access to physician services, we reviewed national surveys and reports on overall Medicare beneficiary access. Because so few physicians and beneficiaries are affected by concierge care, concierge physicians or their patients are unlikely to be randomly chosen to participate in surveys on access to physicians by Medicare beneficiaries. National surveys and analysis on beneficiary access to physician services are also not sufficiently detailed to address concierge care, but they can provide information about physician availability and beneficiary access to care overall. The sources we consulted targeted beneficiaries, physicians, or both and included the following: Bernard, Shulamit, et al. Medicare Fee-for-Service National Implementation Subgroup Analysis. Prepared for the Centers for Medicare & Medicaid Services. Research Triangle Park, N.C.: Research Triangle Institute, 2003. Center for Studying Health System Change. Community Tracking Study (CTS) Section Map. Washington, D.C.: October 2004. http://www.hschange.org/index.cgi?data=10 (downloaded October 2004). Centers for Medicare & Medicaid Services. Medicare Current Beneficiary Survey. Baltimore, Md.: September 2004. http://www.cms.hhs.gov/MCBS/default.asp (downloaded October 2004). GAO. Medicare Fee-for-Service Beneficiary Access to Physician Services: Trends in Utilization of Services, 2000 to 2002. GAO-05- 145R. Washington, D.C.: January 12, 2005. Lake, Timothy, et al. Results from the 2003 Targeted Beneficiary Survey on Access to Physician Services among Medicare Beneficiaries. Prepared for the Centers for Medicare and Medicaid Services. Cambridge, Mass.: Mathematica Policy Research, Inc., 2004. Medicare Payment Advisory Commission. Report to the Congress: Medicare Payment Policy. Washington, D.C.: 2005. Schoenman, Julie, et al. 2002 Survey of Physicians about the Medicare Program. Prepared for the Medicare Payment Advisory Commission. Bethesda, Md.: Project HOPE Center for Health Affairs, 2003. Because concierge physicians generally treat fewer patients than physicians in conventional practices, we assessed community-level data on physician supply to see if other physicians might be available to take on Medicare beneficiaries who choose not to join a concierge practice. We calculated physician-to-population ratios in communities where we found the highest numbers of concierge physicians and compared them to the average ratio for all metropolitan areas in the United States. To calculate this ratio, we used data from a 2003 HHS Health Resources and Services Administration database known as the Area Resource File. This database included county-level data on active, nonfederal, office-based, patient-care physicians from the 2001 American Medical Association Physician Masterfile database and county-level resident population data from the U.S. Census Bureau for 2001, which we aggregated by MSA and PMSA. We did not contact Medicare beneficiaries who were patients of physicians who converted to concierge practices. We obtained information from organizations likely to receive calls from Medicare beneficiaries to determine whether individual beneficiaries were reporting concerns about concierge care or difficulty finding new physicians. We obtained and analyzed information from officials at CMS, call centers for 1-800- MEDICARE, and 15 of 18 CMS contractors that process Medicare claims for outpatient physician services. We spoke with representatives of AARP, the American Bar Association's Commission on Law and Aging, the Center for Medicare Advocacy, the Health Assistance Partnership of Families USA, and the Medicare Rights Center. We conducted our work in accordance with generally accepted government auditing standards from May 2004 through July 2005. This appendix summarizes the results from questions we asked physicians who practiced concierge care as of October 2004. We sent surveys to 185 physicians with valid addresses whom we had identified as potential concierge physicians. We obtained responses from 129 individuals, for an overall response rate of 70 percent, and analyzed the responses from 112 physicians who practiced concierge care in October 2004. The following tables and figures present information on reported characteristics of the 112 concierge physicians who responded to our survey and their practice settings (table 5), the estimated number of patients in their individual practices (table 6), goals for the total number of concierge patients when physicians' practices are fully established (fig. 7), annual membership fees charged by physicians who did and did not bill insurance (fig. 8), actions concierge physicians reported taking to help Medicare beneficiaries who did not join their concierge practices find new physicians (table 7), concierge physicians' views on the sufficiency of HHS guidance on concierge care and Medicare (table 8), and concierge physicians' views on remaining in medical practice and treating Medicare beneficiaries if concierge care were not an option (table 9). In addition to the person named above, key contributors to this report were Kim Yamane, Assistant Director; Ellen W. Chu; Jennifer DeYoung; Linda Y. A. McIver; Perry G. Parsons; Suzanne C. Rubins; Craig Winslow; and Suzanne Worth.

Concierge care is an approach to medical practice in which physicians charge their patients a membership fee in return for enhanced services or amenities. The recent emergence of concierge care has prompted federal concern about how the approach might affect beneficiaries of Medicare, the federal health insurance program for the aged and some disabled individuals. Concerns include the potential that membership fees may constitute additional charges for services that Medicare already pays physicians for and that concierge care may affect Medicare beneficiaries' access to physician services. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 directed GAO to study concierge care and its relationship to Medicare. Using a variety of methods, including a nationwide literature search and telephone interviews, GAO identified 146 concierge physicians and surveyed concierge physicians in fall 2004. GAO analyzed responses from 112 concierge physicians. GAO also reviewed relevant laws, policies, and available data on access to physician services and interviewed officials at the Department of Health and Human Services (HHS) and representatives of Medicare beneficiary advocacy groups. Concierge care is practiced by a small number of physicians located mainly on the East and West Coasts. Nearly all of the 112 concierge physicians responding to GAO's survey reported practicing primary care. Annual patient membership fees ranged from $60 to $15,000 a year, with about half of respondents reporting fees of $1,500 to $1,999. The most often reported features included same- or next-day appointments for nonurgent care, 24-hour telephone access, and periodic preventive care examinations. About three-fourths of respondents reported billing patient health insurance for covered services and, among those, almost all reported billing Medicare for covered services. Two principal aspects of concierge care are of interest to the Medicare program and its beneficiaries: compliance with Medicare requirements and its effect on beneficiary access to physician services. HHS has determined that concierge care arrangements are allowed as long as they do not violate any Medicare requirements; for example, the membership fee must not result in additional charges for items or services that Medicare already reimburses. Some concierge physicians reported to GAO that they would like more HHS guidance. The small number of concierge physicians makes it unlikely that the approach has contributed to widespread access problems. GAO's review of available information on beneficiaries' overall access to physician services suggests that concierge care does not present a systemic access problem among Medicare beneficiaries at this time. In comments on a draft version of this report, HHS agreed with GAO's finding on concierge care's impact on beneficiary access to physician services and indicated it will continue to follow developments in this area.

SNAP is jointly administered by FNS and the states. FNS pays the full cost of SNAP benefits, shares the states' administrative costs, and is responsible for promulgating program regulations and ensuring that state officials administer the program in compliance with program rules. States administer the program by determining whether households meet the program's eligibility requirements, calculating monthly benefits for qualified households, and issuing benefits to participants through an Electronic Benefits Transfer (EBT) system. As shown in figure 1, program participation has increased sharply from fiscal years 1999 to 2009, and indications are that participation has continued to increase significantly in fiscal year 2010. According to FNS, the downturn in the U.S. economy, coupled with changes in the program's rules and administration, has led to an increase in the number of SNAP participants. Eligibility for SNAP is based primarily on a household's income and assets. To determine a household's eligibility, a caseworker must first determine the household's gross income, which cannot exceed 130 percent of the federal poverty level for that year as determined by the Department of Health and Human Services. A household's net income cannot exceed 100 percent of the poverty level (or about $22,056 annually for a family of four living in the continental United States in fiscal year 2010). Net income is determined by deducting from gross income a portion of expenses such as dependent care costs, medical expenses for elderly individuals, utilities costs, and housing expenses. A household's assets are also considered to determine SNAP eligibility and SNAP asset rules are complex. There is a fixed limit, adjusted annually for inflation, on the amount of assets a household may own and remain eligible for SNAP. Certain assets are not counted, such as a home and surrounding lot. There are also basic program rules that limit the value of vehicles an applicant can own and still be eligible for the program. Federal regulations require states to make households categorically eligible for SNAP if the household receives certain cash benefits, such as TANF cash assistance or Supplemental Security Income. States must also confer categorical eligibility for certain households receiving, or authorized to receive, certain TANF non-cash services that are funded with more than 50 percent federal or state maintenance of effort (MOE) funds and serve certain TANF purposes. In addition, in certain circumstances, states have the option to confer categorical eligibility using TANF non-cash services funded with less than 50 percent federal TANF or state MOE funds. The intent of categorical eligibility was to increase program access and reduce the administrative burden on state agencies by streamlining the need to apply means tests for both TANF and SNAP. Improper payments (or payment errors) occur when recipients receive too much or too little in SNAP benefits. FNS and the states share responsibility for implementing an extensive quality control system used to measure the accuracy of SNAP payments and from which state and national error rates are determined. Under FNS's quality control system, the states calculate their payment errors annually by drawing a statistical sample to determine whether participating households received the correct benefit amount. The state's error rate is determined by dividing the dollars paid in error by the state's total issuance of SNAP benefits. Once the error rates are final, FNS is required to compare each state's performance with the national error rate and imposes financial penalties or provides financial incentives according to legal specifications. Trafficking occurs when SNAP recipients exchange SNAP benefits for cash instead of food with authorized retailers. Under the EBT system, SNAP recipients receive an EBT card imprinted with their name and a personal account number, and SNAP benefits are automatically credited to the recipients' accounts once a month. In legitimate SNAP transactions, recipients run their EBT card, which works much like a debit card, through an electronic point-of-sale machine at the grocery checkout counter, and enter their secret personal identification number to access their SNAP accounts. This authorizes the transfer of SNAP benefits from a federal account to the retailer's account to pay for the eligible food items. The legitimate transaction contrasts with a trafficking transaction in which recipients swipe their EBT card, but instead of buying groceries, they receive a discounted amount of cash and the retailer pockets the difference. FNS has the primary responsibility for authorizing retailers to participate in SNAP. To become an authorized retailer, a store must offer, on a continuing basis, at least three varieties of foods in each of the four staple food categories--meats, poultry or fish; breads or cereals; vegetables or fruits; and dairy products--or over 50 percent of its sales must be in a staple group. The store owner submits an application and includes relevant forms of identification such as copies of the owner's Social Security card, driver's license, business license, liquor license, and alien resident card. The FNS field office program specialist then checks the applicant's Social Security number against FNS's database of retailers, the Store Tracking and Redemption System, to see if the applicant has previously been sanctioned in the SNAP program. The application also collects information on the type of business, store hours, number of employees, number of cash registers, the types of staple foods offered, and the estimated annual amount of gross sales and eligible SNAP sales. In addition to approving retailers to participate in the program, FNS has the primary responsibility for monitoring their compliance with requirements and administratively disqualifying those who are found to have trafficked SNAP benefits. FNS headquarters officials collect and monitor EBT transaction data to detect suspicious patterns of transactions by retailers. They then send any leads to FNS program specialists in the field office who either work the cases themselves or refer them to undercover investigators in the Retailer Investigations Branch to pursue by attempting to traffic SNAP benefits for cash. The national payment error rate -- the percentage of SNAP benefit dollars overpaid or underpaid to program participants--has declined by about 56 percent over the last 11 years, from 9.86 percent in 1999 to 4.36 percent in 2009, in a time of increasing participation (see figure 1). Of the total $2.19 billion in payment errors in fiscal year 2009, $1.8 billion, or about 82 percent, were overpayments. Overpayments occur when eligible persons are provided more than they are entitled to receive or when ineligible persons are provided benefits. Underpayments, which occur when eligible persons are paid less than they are entitled to receive, totaled $412 million, or about 18 percent of dollars paid in error, in fiscal year 2009. The decline in payment error rates has been widespread despite the significant increase in participation. Error rates fell in almost all states, and 36 states reduced their error rates by over 50 percent from fiscal years 1999 to 2009. In addition, 47 states had error rates below 6 percent in 2009; this is an improvement from 1999, when 7 states had error rates below 6 percent. However, payment error rates vary among states. Despite the decrease in many states' error rates, a few states continue to have high payment error rates. State use of simplified reporting options has been shown to have contributed to the reduction in the payment error rate. Several options are made available to the states to simplify the application and reporting process, and one such option is simplified reporting. Of the 50 states currently using simplified reporting, 47 have expanded it beyond earned income households, according to a recent FNS report. Once a state has elected to use simplified reporting, eligible households in the state need only report changes occurring between certification and normally scheduled reporting if the changes result in income that exceeds 130 percent of the federal poverty level. This simplified reporting option can reduce a state's error rate by minimizing the number of income changes that must be reported between certifications and thereby reducing errors associated with caseworker failure to act, as well as participant failure to report changes. Despite these simplified reporting options, program eligibility requirements remain complex. This complexity increases the risk that caseworkers will make errors when considering all the factors needed to determine eligibility. Our previous work has shown that the financial eligibility of an applicant can be difficult to verify in means-tested programs, further increasing the risk of payment to an ineligible recipient. For example, caseworkers must verify several types of household assets to determine eligibility and benefit amounts, such as bank accounts, property, and vehicles. While additional efforts to simplify the program may further reduce payment error, it could also reduce FNS' ability to target the program to individual families' needs. Moreover, participant- caused errors, which we earlier reported constitute one-third of the overall national errors, are difficult to prevent. We found that FNS and the states we reviewed have taken many approaches to increasing SNAP payment accuracy, most of which are consistent with internal control practices known to reduce improper payments. Often, several practices are tried simultaneously, making it difficult to determine which have been the most effective. Tracking state performance. FNS staff use Quality Control (QC) data to monitor states' performance over time; conduct annual reviews of state operations; and where applicable, monitor the states' implementation of corrective action plans. FNS, in turn, requires states to perform management evaluations to monitor whether adequate corrective action plans are in place at local offices to address the causes of persistent errors and deficiencies. In addition, in November 2003, FNS created a Payment Accuracy Branch at the national level to work with FNS regional offices to suggest policy and program changes and to monitor state performance. The branch facilitates a National Payment Accuracy Work Group with representatives from each FNS regional office and headquarters who use QC data to review and categorize state performance into one of three tiers. Increased intervention and monitoring approaches are applied when state error rates increase and states are assigned to tier 2 or tier 3. Penalties and incentives. FNS has long focused its attention on states' accountability for error rates through its QC system by assessing financial penalties and providing financial incentives. However, since 2000, USDA leadership has more explicitly established payment accuracy as a program priority. High level USDA officials visited states with particularly high error rates, and FNS has collected a higher percentage of penalties from states compared with prior years. For example, from fiscal year 1992 to 2000, FNS collected about $800,000 in penalties from states. In the next 5 years, FNS collected more than $20 million from states. In fiscal year 2009, 3 states (Maine, West Virginia, and New Mexico) were notified that they had incurred a financial liability for having a poor payment error rate for at least two consecutive years. An additional 9 states and territories (Connecticut, Maryland, Indiana, Wisconsin, Louisiana, Texas, Iowa, Alaska, and Guam) were found to be in jeopardy of being penalized if their error rates do not improve. Ten states and territories received bonus payments for the best and most improved payment error rates in fiscal year 2009 (Delaware, Florida, Georgia, Guam, Maine, Nebraska, Ohio, South Dakota, Washington, Wisconsin). Information sharing. FNS also provides and facilitates the exchange of information gleaned from monitoring by training state QC staff, presenting at conferences, publishing best practice guides, supporting the adoption of program simplification options, and providing states policy interpretation and guidance. At the time of our 2005 study, states we reviewed adopted a combination of practices to prevent, minimize, and address payment accuracy problems, such as: Increasing the awareness of, and the accountability for, payment error. For example, some states set error rate targets for their local offices and hold staff accountable for payment accuracy. Analyzing quality control data to identify causes of common payment errors and developing corrective actions. Making automated system changes to prompt workers to obtain complete documentation from clients. Developing specialized change units that focus on acting upon reported case changes. Verifying the accuracy of benefit payments calculated by state SNAP workers through supervisory and other types of case file reviews. Despite this progress, the amount of SNAP benefits paid in error is substantial, totaling about $2.2 billion in 2009. This necessitates continued top-level attention from USDA management and continued federal and state commitment to determining the causes of improper payments and taking corrective actions to reduce them. The national rate of SNAP trafficking declined from about 3.8 cents per dollar of benefits redeemed in 1993 to about 1.0 cent per dollar during the years 2002 to 2005, as shown in table 1. However, even at that lower rate, FNS estimates that about $241 million in SNAP benefits were trafficked annually in those years. FNS has not completed an updated estimate of trafficking since 2005. Overall, we found that the estimated rate of trafficking at small stores was much higher than the estimated rate for supermarkets and large groceries, which redeem most SNAP benefits. The rate of trafficking in small stores was an estimated 7.6 cents per dollar and an estimated 0.2 cents per dollar in large stores in 2005. With the implementation of EBT, FNS has supplemented its traditional undercover investigations by the Retailer Investigations Branch with cases developed by analyzing EBT transaction data. The nationwide implementation of EBT, completed in 2004, has given FNS powerful new tools to supplement its traditional undercover investigations of retailers suspected of trafficking SNAP benefits. FNS traditionally sent its investigators into stores numerous times over a period of months to attempt to traffic benefits. However, in 1996 Congress gave FNS the authority to charge retailers with trafficking in cases using evidence obtained through an EBT transaction report, called "paper cases." A major advantage of paper cases is that they can be prepared relatively quickly and without multiple store visits. These EBT cases now account for more than half of the permanent disqualifications by FNS. Although the number of trafficking disqualifications based on undercover investigations has declined, these investigations continue to play a key role in combating trafficking. However, as FNS's ability to detect trafficking has improved, the number of suspected traffickers investigated by other federal entities, such as the USDA Inspector General and the U.S. Secret Service, declined, according to data available at the time of our review. These entities have focused more on a smaller number of high-impact investigations. As a result, retailers who traffic are less likely to face criminal penalties or prosecution. In response to our prior recommendation that FNS improves analysis and monitoring, FNS has implemented new technology to improve its ability to detect trafficking and disqualify retailers who traffic, which has contributed to more sophisticated analyses of SNAP transactions and categorization of stores based on risk. Specifically, FNS implemented a revised store classification system to systematically compare similar stores in order to better identify fraudulent transaction activity for investigation. FNS also increased the amount of data available to review and changed its monitoring of transaction data from reviewing monthly data to reviewing these data on a daily basis. FNS also implemented a new tool that assesses each retailer's risk of trafficking. FNS reports that these changes have assisted with early monitoring and identification of violating stores and allocation of its monitoring resources. Consistent with our recommendation that FNS develop a strategy to increase penalties for trafficking, FNS received new authority to impose increased financial penalties for trafficking. The Food, Conservation, and Energy Act of 2008 expanded FNS authority to assess civil money penalties in addition to or in lieu of disqualification. It also provided authority for FNS, in consultation with the Office of the Inspector General, to withhold funds from traffickers during the administrative process, if such trafficking is considered a flagrant violation. Regulations to implement this provision are being developed and FNS expects the proposed rule to be published in July 2012. According to FNS, the rule that will address addition of monetary sanctions to disqualification is targeted for publication in September 2011. Until the policy is implemented, the impact of this change will not be known. Despite the progress FNS has made in combating retailer trafficking, the SNAP program remains vulnerable. Program vulnerabilities we identified include: Limited inspection of stores. FNS authorizes some stores with limited food supplies so that low-income participants in areas with few supermarkets have access to food, but may not inspect these stores again for 5 years unless there is some indication of a problem. Varied state efforts. Some states actively pursue and disqualify recipients who traffic their benefits while inaction by other states allow recipients suspected of trafficking to continue the practice. We recommended in our October 2006 report that FNS promote state efforts to pursue recipients suspected of trafficking by revisiting the incentive structure to incorporate additional provisions to encourage states to investigate and take action against recipients who traffic. We also recommended that FNS ensure that field offices report to states those recipients who are suspected of trafficking with disqualified retailers. However, FNS officials told us they have taken few recent steps to increase state efforts to pursue recipients suspected of trafficking, in part because of state resource constraints, but will continue to examine the impact of financial incentives in preparation for the expected upcoming program reauthorization. States that confer TANF non-cash categorical eligibility use a variety of TANF services to qualify participants for SNAP benefits. According to FNS, as of June 2010, 36 states are using broad-based policies that could make most, if not all, TANF non-cash households categorically eligible for SNAP because the households receive TANF/MOE funded benefits, such as brochures or information referral services. This is an increase from the 29 states that conferred this type of categorical eligibility at the time of our 2007 report. Other states have more narrow policies in place that could make a smaller number of households categorically eligible for SNAP because they receive a TANF/MOE funded benefit such as child care or counseling. These categorically eligible households do not need to meet SNAP eligibility requirements such as the SNAP asset or gross income test because their general need has been established by the TANF program. For example, in 35 of the states that confer categorical eligibility for all TANF services, there is no limit on the amount of assets a household may have to be determined eligible, according to a FNS report. In addition, the gross income limit of the TANF program set by these states ranged from 130 to 200 percent of the federal poverty level, according to a FNS report. As a result, households with substantial assets but low income could be deemed eligible for SNAP under these policies. Even though households may be deemed categorically eligible for SNAP, the amount of assistance households are eligible for is determined based on each household's income and other circumstances using the same process used for other SNAP recipients. Some families determined categorically eligible for the program could be found eligible for the minimum benefit. However, FNS noted in a recent report that families with incomes above 130 percent of the federal poverty level and high expenses (shelter costs, dependent care expenses, and medical costs) could receive a significant SNAP benefit. Households can be categorically eligible for SNAP even if they receive no TANF funded service other than a toll-free telephone number or informational brochure. For example, one state reported to FNS that it included information about a pregnancy prevention hotline on the SNAP application to confer categorical eligibility. Other states reported providing households brochures with information about available services, such as domestic violence assistance or marriage classes, to confer categorical eligibility. Receipt of the information on the SNAP applications or on the brochures can qualify the household to be categorically eligible for SNAP benefits. However, the amount of the SNAP benefit is still determined in accordance with SNAP rules by the eligibility workers using information on income and expenses. In 2007, we reported that six states may not have been following program regulations because they were not using certain TANF noncash services to confer SNAP categorical eligibility. These services included child care, transportation, and substance abuse services, which may have been funded by more than 50 percent federal TANF or state MOE funds. In addition, some states reported that they did not specifically determine whether an individual needs a specific TANF noncash service before conferring SNAP eligibility. We recommended that FNS provide guidance and technical assistance to states clarifying which TANF noncash services states must use to confer categorical eligibility for SNAP and monitor states' compliance with categorical eligibility requirements. In September 2009, USDA released a memorandum encouraging states to continue promoting noncash categorical eligibility. FNS reported that four of the six states currently are using the required noncash services to confer categorical eligibility. FNS has encouraged states to adopt categorical eligibility to improve program access and simplify the administration of SNAP. According to FNS officials, increased use of categorical eligibility by states has reduced administrative burdens and increased access to SNAP benefits to households who would not otherwise be eligible for the program due to SNAP income or asset limits. Adoption of this policy option can provide needed assistance to low-income families, simplify state policies, reduce the amount of time states must devote to verifying assets, and reduce the potential for errors, according to FNS. FNS recently also encouraged states that have implemented a broad-based categorical eligibility program with an asset limit to exclude refundable tax credits from consideration as assets. In our previous work, we found that many of the states' SNAP officials surveyed believed eliminating TANF non-cash categorical eligibility would decrease participation in SNAP. Many of the states' SNAP officials we surveyed also believed that eliminating TANF non-cash categorical eligibility would increase the SNAP administrative workload and state administrative costs. Some common reasons state officials indicated for the increase in SNAP administrative workload were: increase in verifications needed, increase in error rates as required verifications increase, changes to data systems, increase in time to process applications, and changes to policies and related materials. While FNS and the states believe categorical eligibility has improved program access and payment accuracy, the extent of its impact on access and program integrity is unclear. Over the past few years, the size of the Supplemental Nutrition Assistance Program has grown substantially, both in terms of the number of people served and the amount paid out in benefits, at a time when the slow pace of the economic recovery has left many families facing extended hardship. At the same time, due largely to the efforts of FNS working with the states, payment errors have declined and mechanisms for detecting and reducing trafficking have improved. However, little is known about the extent to which increased use of categorical eligibility has affected the integrity of the program. Further, improper payments in the program continue to exceed $2 billion and retailer fraud remains a serious concern, highlighting the importance of continued vigilance in ensuring that improvements in program access are appropriately balanced with efforts to maintain program integrity. As current fiscal stress and looming deficits continue to limit the amount of assistance available to needy families, it is more important than ever that scarce federal resources are targeted to those who are most in need and that the federal government ensure that every federal dollar is spent as intended. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or members of the Subcommittee may have. For future contacts regarding this testimony, please contact Kay Brown at (202) 512-7215 or e-mail [email protected]. Key contributors to this testimony were Kathy Larin, Cathy Roark, and Alex Galuten. Domestic Food Assistance: Complex System Benefits Millions, but Additional Efforts Could Address Potential Inefficiency and Overlap among Smaller Programs. GAO-10-346. Washington, D.C.: April 15, 2010. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. Food Stamp Program: FNS Could Improve Guidance and Monitoring to Help Ensure Appropriate Use of Noncash Categorical Eligibility. GAO-07-465. Washington, D.C.: March 28, 2007. Food Stamp Program: Payment Errors and Trafficking Have Declined despite Increased Program Participation. GAO-07-422T. Washington, D.C.: January 31, 2007. Food Stamp Trafficking: FNS Could Enhance Program Integrity by Better Targeting Stores Likely to Traffic and Increasing Penalties. GAO-07-53. Washington, D.C.: October 13, 2006. Improper Payments: Federal and State Coordination Needed to Report National Improper Payment Estimates on Federal Programs. GAO-06-347. Washington, D.C.: April 14, 2006. Food Stamp Program: States Have Made Progress Reducing Payment Errors, and Further Challenges Remain. GAO-05-245. Washington, D.C.: May 5, 2005. Food Stamp Program: Farm Bill Options Ease Administrative Burden, but Opportunities Exist to Streamline Participant Reporting Rules among Programs. GAO-04-916. Washington, D.C.: September 16, 2004. Food Stamp Program: States Have Made Progress Reducing Payment Errors, and Further Challenges Remain. GAO-05-245. Washington, D.C.: May 5, 2005. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The U.S. Department of Agriculture's (USDA) Supplemental Nutrition Assistance Program (SNAP) is intended to help low-income individuals and families obtain a better diet by supplementing their income with benefits to purchase food. USDA's Food and Nutrition Service (FNS) and the states jointly implement SNAP. Participation in the program has risen steadily over the last decade to an all time high of more than 33 million in fiscal year 2009, providing critical assistance to families in need. This testimony discusses GAO's past work on three issues related to ensuring integrity of the program: (1) improper payments to SNAP participants, (2) trafficking of SNAP benefits, and (3) categorical eligibility for certain individuals or households. This testimony is based on prior GAO reports on categorical eligibility (GAO-07-465), payment errors (GAO-05-245), and food stamp trafficking (GAO-07-53), developed through data analyses, case file reviews, site visits, interviews with officials, and a 50- state survey. GAO also updated data where available and collected information on recent USDA actions and policy changes. The national payment error rate reported for SNAP, which combines states' overpayments and underpayments to program participants, has declined by 56 percent from 1999 to 2009, from 9.86 percent to a record low of 4.36 percent. This reduction is due, in part, to options made available to states that simplified certain program rules. In addition, FNS and the states GAO reviewed have taken several steps to improve SNAP payment accuracy that are consistent with internal control practices known to reduce improper payments such as providing financial incentives and penalties based on performance. Despite this progress, the amount of SNAP benefits paid in error is substantial, totaling about $2.2 billion in 2009 and necessitating continued top-level attention and commitment to determining the causes of improper payments and taking corrective actions to reduce them. FNS estimates indicate that the national rate of food stamp trafficking declined from about 3.8 cents per dollar of benefits redeemed in 1993 to about 1.0 cent per dollar during the years 2002 to 2005 but that trafficking occurs more frequently in smaller stores. FNS has taken advantage of electronic benefit transfer to reduce fraud, and in response to prior GAO recommendations, has implemented new technology and categorized stores based on risk to improve its ability to detect trafficking and disqualify retailers who traffic. FNS also received authority to impose increased financial penalties for trafficking as recommended; however, it has not yet assessed higher penalties because implementing regulations are not yet finalized. FNS is considering additional steps to encourage states to pursue recipients suspected of trafficking but limited state resources are a constraint. Categorically eligible households do not need to meet SNAP eligibility requirements because their need has been established under the states' Temporary Assistance for Needy Families (TANF) program. As of June 2010, 36 states have opted to provide categorical eligibility for SNAP to any household found eligible for a service funded through TANF and, in 35 states, there is no limit on the amount of assets certain households may have to be determined eligible, according to FNS. Households can be categorically eligible for SNAP even if they receive no TANF funded service other than a toll-free telephone number or informational brochure. However, the amount of assistance eligible households receive is determined using the same process used for other SNAP recipients. According to FNS officials, increased use of categorical eligibility by states has reduced administrative burdens and increased access to SNAP benefits to households who would not otherwise be eligible due to asset or income limits. However, little is known about the extent of its impact on increased access or program integrity. SNAP has played a key role in assisting families facing hardship during the economic crisis, but given fiscal constraints and program growth, it is more important than ever to understand the impact of policy changes, and balance improvements in access with efforts to ensure accountability. FNS generally agreed with GAO's prior recommendations to address SNAP trafficking and categorical eligibility issues and has taken action in response to most of them.

An effective communications infrastructure, including voice and data networks, is essential to our ability as a nation to maintain public health and safety during a catastrophic natural disaster, such as a hurricane, or a man-made event, such as a terrorist attack. Technological advances in these networks have led to a convergence of the previously separate networks used to transmit voice and data communications. These new networks--next generation networks--are capable of transmitting both voice and data on a single network and eventually will be the primary means for voice and data transmissions. Converged voice and data networks have many benefits. For example, these networks use technology based on packet switching, which allows greater resiliency. Packet switching involves breaking a message into packets, or small chunks of data, and transferring the packets across a network to a destination where they are recombined. The resiliency of using a packet-switching network is due to the packet's ability to be transmitted over multiple routes, avoiding areas that may be congested or damaged. Conversely, conventional voice services use traditional telephone networks, which are based on circuit switching technology. Instead of breaking a message up into packets, circuit-switching uses a dedicated channel to transmit the voice communication. Once all of the channels are occupied, no further connections can be made until a channel becomes available. Figure 1 shows a comparison between packet switching and circuit switching. Converged networks, however, also pose certain technical challenges. For example, current national programs to provide priority voice services in an emergency are based primarily on voice or traditional telephone networks, which are circuit-switched. Implementing these networks on packet- switched networks is difficult because there is no uniformly accepted standard for providing priority service on a packet-switched network. Also, the Internet-based protocols used on packet-switched networks have vulnerabilities and in certain cases, packet-switched networks may be unreliable for emergency communications due to delays in transmission and loss of packets. Federal policies call for the protection of essential public and private infrastructures, such as the electric power grid, chemical plants, and water treatment facilities that control the vital functions critical to ensuring our national economic security and public health and safety. These infrastructures, called critical infrastructures, also include communications infrastructure, such as voice and data communication networks. Federal policies also designate certain federal agencies as lead points of contact for each key critical infrastructure sector and assign responsibility for infrastructure protection activities and for coordination with other relevant federal agencies, state and local governments, and the private sector. (See app. II for a description of the sectors and the designated federal agencies.) DHS is the lead federal agency for both the telecommunications and information technology (IT) sectors. DHS is also designated as the focal point for the security of cyberspace--including analysis, warning, information sharing, vulnerability reduction, mitigation, and recovery efforts for public and private critical infrastructure information systems. As part of its responsibilities, DHS created the National Infrastructure Protection Plan to coordinate the protection efforts of critical infrastructures. The plan recognizes the Internet as a key resource composed of assets within both the IT and the telecommunications sectors. It notes that the Internet is used by all critical infrastructure sectors to varying degrees and that it provides information and communications to meet the needs of businesses, government, and the other sectors. The National Infrastructure Protection Plan requires lead federal agencies for the critical infrastructure sectors to work with public and private sector stakeholders to develop sector-specific plans that address how the sectors' stakeholders will improve the security of their assets, systems, networks, and functions. We recently reported on how comprehensively these sector-specific plans address the cyber security aspects of their sectors, including the plans for the IT and telecommunications sectors. We found that the plans varied in how sector stakeholders identified their cyber risks and developed plans to identify, respond to, and recover from a cyber attack. Accordingly, we recommended specific measures to help DHS strengthen the development, uniformity, and use of the plans. Federal policies provide DHS the lead responsibility for facilitating a public-private response to disruptions to major communications infrastructure, such as voice and data networks. Within DHS, the responsibility is assigned to NCSD and NCS in the Office of Cyber Security and Communications. NCSD has responsibility for the security of data and applications and executes this duty via its operations center--US-CERT-- while NCS has responsibility for the communications infrastructure that carries data and applications and carries out its duty through its coordination center, NCC, and its operations center, NCC Watch. In June 2003, DHS created NCSD to serve as the national focal point for addressing cyber security issues. NCSD's mission is to secure cyberspace and America's cyber assets in cooperation with public, private, and international entities. The division carries out its mission via its US-CERT operations center, which is responsible for, among other things, analyzing and addressing cyber threats and vulnerabilities and disseminating cyber- threat warning information. In the event of a security issue or disruption affecting data and applications, US-CERT is to facilitate coordination of recovery activities with the network and security operations centers of owners and operators of these networks and with government officials (e.g., incident response teams) responsible for protecting government networks. NCSD is the government lead on a public/private partnership supporting US-CERT and serves as the lead for the federal government's cyber incident response through the National Cyber Response Coordination Group. This group is the principal federal interagency mechanism for coordinating the preparation for and response to significant cyber incidents, such as a major Internet disruption, and includes members from 19 federal departments and agencies. NCS is responsible for ensuring that communications infrastructure used by the federal government is available under all conditions--ranging from normal situations to national emergencies and international crises. The system does this through several activities, including a program that gives calling priority to federal executives, first responders, and other key officials in times of emergency. NCS was established by presidential direction in August 1963 in response to voice communication failures associated with the Cuban Missile Crisis. Its role was further clarified through an executive order issued in April 1984 that established the Secretary of Defense as the executive agent for NCS. In 2003, it was transferred to the responsibility of the Secretary of DHS. NCS is composed of members from 24 federal departments and agencies. Although it originally focused on "traditional" voice services via common carriers, NCS has now taken a larger role in Internet-related issues due to the convergence of voice and data networks. For example, it now helps manage issues related to disruptions of the Internet backbone (e.g., high- capacity data routes). NCC, which serves as the coordination component of NCS, is the point of contact with the private sector on issues that could affect the availability of the communications infrastructure. According to DHS, the center includes 47 members from major telecommunications organizations, such as Verizon and AT&T. These members represent 95 percent of the wireless and wire line telecommunications service providers and 90 percent of the Internet service provider backbone networks. During a major disruption in telecommunications services, NCC Watch is to coordinate with NCC members in an effort to restore service as soon as possible. In the event of a major Internet disruption, it is to assist recovery efforts through its partnerships and collaboration with telecommunications and Internet-related companies. Using these partnerships, NCC has also created several programs that, in times of emergency, provide calling priority in to enable first responders and key officials at all levels to communicate using both landline phones and cellular devices. Since February 2002, we, along with federal government and private sector experts, have examined the convergence of voice and data networks into next generation networks. All these experts recommend that federal agencies such as DHS adopt an integrated approach--including integrating their organizations--to planning for and responding to network disruptions. In February 2002, before the formation of DHS, a White House advisory group recommended that the federal government develop such an approach. Specifically, it found that timely information sharing was essential to effective incident response, that existing coordination within the government was ineffective and needed senior management attention, and that NCS should broaden its capabilities to include more IT industry expertise. In March 2006, the National Security Telecommunications Advisory Committee, a presidential advisory group, also recommended that DHS develop an integrated approach to incident response on next generation networks and update priority communications programs to improve existing recovery abilities. The committee recommended that DHS establish an inclusive and effective incident response capability that includes functions of the NCC and a broadened membership, including firms in the IT sector. The committee also stated that most new communications providers are not members of the NCC, were not easily accessible during an incident, and had not yet developed close working relationships with other industry stakeholders and the federal government. In June 2006, we recommended that DHS improve its approach to dealing with disruptions by examining the organizational structure of NCSD and NCS in light of the convergence of voice and data networks. We found that DHS had overlapping responsibilities for incident response, which affected the ability of DHS to prioritize and coordinate incident response activities. Furthermore, in December 2006, the Telecommunications and Information Technology Information Sharing and Analysis Centers, composed of representatives of private telecommunications and IT companies, sent a letter to DHS asking that the department develop a plan to integrate critical infrastructure protection efforts including planning for and responding to disruptions. In a January 2007 written response signed by the Assistant Secretary for Cyber Security and Communications, DHS agreed with the importance of this effort and stated that developing a road map for integration was a priority. Moreover, in April 2007, the two information sharing and analysis centers established a task force (referred to as a "tiger team" by DHS) with DHS that, among other things, identified overlapping responsibilities between NCC Watch and US-CERT in the following areas: developing and disseminating warnings, advisories, and other urgent evaluating the scope of an event; deploying response teams during an event; integrating cyber, communications, and emergency response exercises into operational plans and participation; and the management of relationships with others, such as industry partners. Consequently, the tiger team task force recommended merging the two centers to establish an integrated operations center and further recommended that DHS adopt a three-step approach to integration of the centers. The approach should include: moving NCC Watch to office space physically adjacent to US-CERT, developing an integrated operations center by merging US-CERT and NCC inviting private sector critical infrastructure officials to join this new center. In addition to these three steps, the task force also recommended specific actions to be taken in implementing them. For example, in developing an integrated operations center by merging NCC Watch and US-CERT, the task force recommended, among other things, that DHS (1) appoint a project manager to lead this effort; (2) develop policies and procedures that integrate operations and address overlapping responsibilities, including how the new center is to respond in an integrated manner to threats and incidents; and (3) establish performance measures to monitor progress. In addition, with regard to involving key private sector critical infrastructure officials in the new center, the task force recommended that the department also appoint a project manager to lead this effort. This effort would include seeking participation of appropriate private sector officials, identifying any potential legal issues to having these officials serve in the new center, and developing measures to monitor progress. In September 2007, DHS approved the report, accepting the recommendations and adopting the three-step approach. DHS has taken the first of three steps toward integrating NCSD and NCS by moving the two centers, NCC Watch and US-CERT, to adjacent office space in November 2007. This close proximity allows the approximately 41 coordination center and 95 readiness team analysts to, among other things, readily collaborate on planned and ongoing activities. In addition, the centers have jointly acquired common software tools to identify and share physical, telecommunications, and cyber information related to performing their missions. For example, the centers use one of the tools to develop a joint "morning report" specifying their respective security issues and problems, which is used by the analysts in coordinating responses to any resulting disruptions. While DHS has completed the first step, it has yet to implement the remaining two steps and supporting actions. Specifically, the department has not organizationally merged or integrated operation centers or completed any of the supporting actions. For example, the department has not hired a project manager, developed common operating procedures, or established progress measures. In addition, according to DHS officials, they have no efforts planned or underway to implement this step and associated actions. With regard to involving key private sector officials to participate in the proposed joint center, the department has not accomplished this step and supporting actions either. For example, it has not hired a project manager or sought participation of appropriate private sector officials to work at the new center. DHS officials told us they also have no efforts planned or underway to implement this step and its supporting actions. A key factor contributing to DHS's lack of progress in implementing these steps is that completing the integration is not a top department priority. Instead, DHS officials stated that their efforts have been focused on other initiatives, most notably the President's recently announced cyber initiative, which is a federal governmentwide effort to manage the risks associated with the Internet's nonsecure external connections. Officials from DHS's Office of Cyber Security and Communications stated that they are in the process of drafting a strategic plan to provide overall direction for the activities of NCS and NCSD, including completing the integration of the centers. However, the plan is in draft and has been so since mid-2007. In addition, DHS officials could not provide a date for when it would be finalized. Consequently, the department does not have a strategic plan or related guidance that provides overall direction in this area and has not developed specific tasks and milestones for achieving the remaining two integration steps. Until DHS completes the integration of these two centers, it risks being unable to efficiently plan for and respond to disruptions to communication infrastructure, including voice and data networks, and the information traveling on these networks, increasing the probability that communications will be unavailable or limited in times of need. While DHS has taken initial steps toward integrating the key centers that plan for and respond to disruptions to the communications infrastructure, including voice and data networks, and the data and applications on these networks, these offices are still not fully integrated as envisioned. Consequently, the risks associated with not having a fully integrated response to disruptions to the communications infrastructure remain. Effectively mitigating these risks will require swift completion of the integration. To do this will also require strong leadership to make the integration effort a department priority and to managing it accordingly, including completing the strategic plan and defining remaining integration tasks and milestones. To do less will continue to expose the nation's communications networks to continuing risk of inadequate response to an incident. We are making two recommendations to the Secretary of Homeland Security to direct the Assistant Secretary for Cyber Security and Communications to Establish milestones for completing the development and implementation of the strategic plan for NCSD and NCS. Define specific tasks and associated milestones for establishing the integrated operations center through merging NCC Watch and US-CERT and inviting and engaging key private sector critical infrastructure officials from additional sectors to participate in the operations of the new integrated center. In written comments on a draft of this report (see app. III), signed by the Acting Director of DHS's Departmental Liaison Office, the department concurred with our first recommendation and stated it is taking steps to implement it. Specifically, the department said that as part of its effort to develop and implement a strategic plan, it intends to take into consideration, among other things, the recommendations of the various expert groups that have studied issues confronting DHS in this area and the lessons learned from collocating the two centers. Further, the department stated that this strategic planning also is to provide for integrating the centers' existing overlapping functions with the aim of increasing mission effectiveness. With regard to our second recommendation, DHS stated that, while it supports further integration of overlapping functions, it does not support organizationally merging the centers at this point and added that the lack of a merger will not impact its ability to respond to incidents. We do not agree. To the contrary, there is strong evidence that shows that DHS's ability to respond is negatively impacted by the use of separate centers, rather than a single integrated and merged entity. Specifically, our past work has shown that overlapping responsibilities for incident response have adversely affected DHS's ability to prioritize and coordinate incident response activities. For example, private-sector firms have reported that in responding to a critical incident, DHS made time-consuming and duplicative requests for information without identifying how this information would be beneficial in helping respond to the event. In addition, the DHS-commissioned expert task force on the subject recently reported that without an organizationally integrated center, the department will not have a comprehensive operating picture of the nation's cyber and communications infrastructure and thus not be able to effectively implement activities necessary to prepare, protect, respond, and recover this infrastructure. Further, our interviews with private- sector cyber and communications infrastructure executives performed as part of this engagement found that they also favor a merged organization that includes broad industry participation. This evidence calls for DHS to take a closer look at the issue of whether to merge the centers. DHS also commented on the report's description of the roles and responsibilities of NCC and US-CERT. Specifically, DHS noted that our original characterization of NCC as dealing with voice systems and US-CERT with data systems was not totally accurate. Instead, DHS offered that a more accurate distinction would be that NCC deals with communication infrastructure, including voice and data networks, and US-CERT deals with the security of systems and data using the networks, which DHS commonly refers to as cyber situational awareness and response. We agree with this comment and have incorporated it in the report where appropriate. In addition to its written response, the department also provided technical comments that we have incorporated in the report where appropriate. We will send copies of this report to interested congressional committees, the Secretary of Homeland Security, and other interested parties. In addition, this report will be available at no charge on GAO's Web site at http://www.gao.gov. If you have any questions on matters discussed in this report, please contact David A. Powner at (202) 512-9286 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our objective was to determine the status of Department of Homeland Security (DHS) efforts to integrate the activities of its National Cyber Security Division (NCSD) and National Communications System (NCS) in preparing for and responding to disruptions in converged voice and data networks. To accomplish this, we first analyzed pertinent laws, policies, and related DHS documentation (e.g., charters and mission statements) showing the responsibilities of NCSD and NCS, particularly with regard to the increasing convergence of voice and data networks. We also analyzed key studies on DHS's approach to managing convergence. We did this to identify key findings and recommendations pertinent to our objective. In particular, we focused on the Industry-Government Tiger Team Report and Recommendations for a Cyber Security and Communications Joint Operations Center, which recommended establishing an integrated operations center. DHS adopted the recommendations as part of its three- step approach to establish such a capability by (1) moving the National Coordination Center (NCC) Watch to office space physically adjacent to the US Computer Emergency Readiness Team (US-CERT), (2) developing an integrated operations center by merging NCC Watch and US-CERT, and (3) inviting private sector critical infrastructure officials to participate in this new center. We also interviewed DHS and industry officials who served on the tiger team task force and developed the report findings and recommendations. To determine the status of DHS's efforts to integrate the centers, we analyzed department progress against the three steps specified in DHS's approach. We also obtained and analyzed plans and related documentation from DHS on its status in establishing an integrated operations center capability. In particular, we assessed department plans and related documentation on the status of collocating and merging the NCS and NCSD operations centers. In addition, we analyzed documentation on DHS's status in inviting key private sector infrastructure officials to join the operations of the new center. We also interviewed relevant officials in these organizations, including the managers of the National Coordination Center and the U.S. Computer Emergency Readiness Team, the Director of NCS, and the Acting Director of NCSD, to get their perspectives and to validate our understanding of their efforts to date. We also interviewed private sector officials--including the Chair of the Communications Information Sharing and Analysis Center and the President and Vice President of the IT Information Sharing and Analysis Center--to obtain their perspectives on DHS's progress in addressing convergence, including establishing the integrated center and to determine whether they had received DHS invitations to participate in the operation of the integrated center. Next, to identify gaps, we compared the state of DHS's progress against the task force recommendations adopted by DHS as part of its three step approach to integration. When gaps were identified, we also interviewed responsible DHS officials to determine any causes and their impact. We conducted this performance audit in the Washington, D.C. metropolitan area from September 2007 to June 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Gary Mountjoy (Assistant Director), Scott Borre, Camille Chaires, Neil Doherty, Vijay D'Souza, Nancy Glover, Lee McCracken, and Jeffrey Woodward made key contributions to this report.

Technological advances have led to an increasing convergence of previously separate networks used to transmit voice and data communications. While the benefits of this convergence are enormous, such interconnectivity also poses significant challenges to our nation's ability to respond to major disruptions. Two operations centers--managed by the Department of Homeland Security's (DHS) National Communications System and National Cyber Security Division--plan for and monitor disruptions on voice and data networks. In September 2007, a DHS expert task force made three recommendations toward establishing an integrated operations center that the department agreed to adopt. To determine the status of efforts to establish an integrated center, GAO reviewed documentation, interviewed relevant DHS and private sector officials, and reviewed laws and policies to identify DHS's responsibilities in addressing convergence. DHS has taken the first of three steps toward integrating its centers that are responsible for planning for, monitoring, and responding to disruptions to the communications infrastructure, including voice and data networks, and the security of data and applications that use these networks. Specifically, in November 2007, it moved the operations center for communications infrastructure (NCC Watch) to office space adjacent to the center for data and applications (US-CERT). This close proximity allows the approximately 41 coordination center and 95 readiness team analysts to, among other things, readily collaborate on planned and ongoing activities. In addition, the centers have jointly acquired common software tools to identify and share physical, telecommunications, and cyber information related to performing their missions. For example, the centers use one of the tools to develop a joint "morning report" specifying their respective network security issues and problems, which is used by the analysts in coordinating responses to any resulting disruptions. While DHS has completed the first integration step, it has yet to implement the remaining two steps. Specifically, although called for in the task force's recommendations, the department has not organizationally merged the two centers or invited key private sector critical infrastructure officials to participate in the planning, monitoring, and other activities of the proposed joint operations center. A key factor contributing to DHS's lack of progress in implementing the latter two steps is that completing the integration has not been a top DHS priority. Instead, DHS officials stated that their efforts have been focused on other initiatives, most notably the President's recently announced cyber initiative, which is a federal governmentwide effort to manage the risks associated with the Internet's nonsecure external connections. Nevertheless, DHS officials stated that they are in the process of drafting a strategic plan to provide overall direction for the activities of the National Communications System and the National Cyber Security Division. However, the plan is in draft and has been so since mid-2007. In addition, DHS officials could not provide a date for when it would be finalized. Consequently, the department does not have a strategic plan or related guidance that provides overall direction in this area and has not developed specific tasks and milestones for achieving the two remaining integration steps. Until DHS completes the integration of the two centers, it risks being unable to efficiently plan for and respond to disruptions to communications infrastructure and the data and applications that travel on this infrastructure, increasing the probability that communications will be unavailable or limited in times of need.

Asparagus is a perennial crop that has a relatively long life expectancy of up to 20 years in commercial plantings. Since the crop is not usually harvested for the first 3 years, asparagus production represents a significant long-term investment for growers. In addition, since the time from planting to the first harvest takes 3 years, producers cannot quickly increase production in response to market demand. While asparagus is a native of temperate regions, its cultivation is most successful in locations where either extreme temperature or drought stops the growth of the plant, providing it with a rest period. Asparagus is produced and sold either as fresh, uncooked whole spears or processed (heat-treated canned or frozen) whole spears or cut pieces. Asparagus is a labor-intensive, high-value vegetable crop. For example, according to the U.S. Department of Agriculture (USDA), in 2000, the season-average shipping-point price for fresh asparagus was $1.14 per pound. In comparison, the price for the second and third highest value vegetables--artichokes and fresh market snap beans--was $0.64 and $0.42 per pound, respectively. In 2000, the United States produced 227 million pounds of asparagus having a value of about $217 million. The majority of the asparagus produced was green asparagus for the fresh market--66 percent was fresh, while 34 percent was processed (about 28 percent was for canning and 6 percent for freezing). Figure 1 shows the annual quantity of domestic production from 1990 to 2000. As shown in figure 1, the production of fresh asparagus in the United States trended downward until 1995, when it reached a low in part due to poor weather in California. Since then, production has been increasing. In contrast, the production of asparagus for processing has been steadily declining. The major commercial asparagus-producing states are California, Washington, and Michigan. California, the most important state for fresh production, has a harvest season from January through May. While Washington and Michigan produce some asparagus for the fresh market, the majority of their production is for the processed market. Production from Michigan occurs from May through June and Washington from May through July. In recent years, Washington has begun shifting some production from asparagus for processing to fresh asparagus, although doing so is costly for producers. Thus, when the three states are considered, domestically produced fresh asparagus is available from January through July. At other times of the year, only canned and frozen production is available from domestic sources. In recent years, imports have accounted for a growing proportion of the U.S. fresh asparagus supply and, in 1999, represented 57 percent of fresh asparagus consumption. In 1999, over 90 percent of total U.S. asparagus imports were of fresh asparagus. The growth in imports has been made possible, in part, by the Andean Trade Preference Act and the North American Free Trade Agreement (NAFTA). ATPA, which was signed into law in December 1991, eliminates or reduces U.S. tariffs on eligible products from four Andean countries--Bolivia, Colombia, Ecuador, and Peru. ATPA's primary goal is to promote broad- based economic development in these Andean countries and to develop viable economic alternatives to coca cultivation and cocaine production by offering Andean products broader access to the U.S. market. The President proclaimed preferential duty treatment for Peru in 1993. These preferences are scheduled to end effective December 4, 2001. NAFTA, which was ratified by the Congress in 1993 and implemented in January 1994, created a free trade area between Canada, Mexico, and the United States. NAFTA provides for the gradual elimination of tariffs--from as high as 25 percent on fresh asparagus--and other trade barriers on most goods, over a 10- to 15-year period. As shown in figure 2, asparagus imports were increasing prior to ATPA's and NAFTA's enactment and have continued to increase since that time. For example, imports grew from 44 million pounds in 1990 to 142 million pounds in 1999--an average annual rate of increase of 14 percent, whereby Mexico and Peru provided most of the increase. According to information from the Peruvian Asparagus Institute,increases in asparagus production, assisted by the implementation of ATPA, have resulted in making asparagus Peru's second largest export crop, after coffee. Peru has also developed a modern frozen asparagus industry and has rapidly increased exports of this product to the United States and U.S. frozen export markets, such as Japan. Asparagus accounted for 14.1 percent of Peru's agricultural exports and resulted in employment for over 20,000 Peruvians in 1999. According to the U.S. International Trade Commission's (ITC) 1999 study, ATPA has displaced an estimated 2 to 8 percent of the total value of domestic fresh asparagus production from what it would have been without the act. U.S. consumers, however, benefited from the availability of fresh asparagus from Peru during the months when fresh asparagus is not generally available from domestic producers--August through December. In addition, changes in consumer preference contributed to a downward shift in the domestic demand for processed asparagus. Using 1999 data, ITC estimated that the total impact of ATPA's tariff reductions has been a 2- to 8-percent displacement of the total value of U.S. fresh asparagus production by Peruvian imports as consumers substituted asparagus imported from Peru for domestically produced product. According to ITC, asparagus and cut flowers are the two industries experiencing potentially significant displacement under ATPA. ITC measured the impact of tariff reductions under ATPA by comparing estimated market conditions under full tariff treatment versus actual market conditions under duty-free entry. A decrease in the price of imported asparagus caused by tariff reductions results in the substitution of imported asparagus for domestically produced asparagus, but the displacement is not one for one because of various reasons, such as a retailer's preference for marketing domestically produced product. Consumers have benefited from ATPA because fresh asparagus is now available during the months when it is generally unavailable from domestic producers. This increased availability, combined with consumers' preference for fresh asparagus, has contributed to a downward shift in the consumption of processed asparagus. Figure 3 shows that the U.S. primarily produces and ships fresh asparagus during January through July. In contrast, imports from Peru occur nearly year-round, including months when U.S. fresh production is unavailable. As the figure shows, the majority of imports from Peru occur from August through December, when there is virtually no U.S. fresh production. Only canned or frozen asparagus is available from domestic sources during this time. Fresh asparagus from Peru is available, in part, because the elimination of tariffs reduced the price of Peruvian asparagus in the United States. While imports from Peru have increased the supply of fresh asparagus in the United States, demand has been strong, as demonstrated by the increased per capita consumption of fresh asparagus. As figure 4 shows, in the mid-1980s, the per capita consumption of asparagus shifted from processed to fresh asparagus, demonstrating consumers' preference for the latter. This shift in consumer preference accelerated in the mid-1990s, as fresh asparagus became available on a year-round basis. The shift in the per capita consumption of asparagus is part of the general trend toward increased consumer preference for fresh vegetables. In addition, the consumption of asparagus, which is a high-value product, is particularly responsive to increases in personal income, according to econometric studies. In the latter half of the 1990s, real disposable personal income increased by an average annual rate of about 3 percent. The increase in fresh asparagus consumption has helped keep prices trending upward despite the increase in supply from imports. In contrast, shifts in preference and the declining consumption of processed asparagus have kept prices for processed asparagus relatively flat, as shown in figure 5. The decline in the consumption of processed asparagus particularly affects producers in Michigan and Washington, the two states that produce the majority of frozen and canned asparagus. For example, processed asparagus accounted for approximately 86 percent and 68 percent of the production of that crop in Michigan and Washington, respectively, in 2000. Our analysis shows that processed asparagus decreased from 42 percent of domestic production in 1990 to 34 percent in 2000. Most of the decline occurred in Washington. If ATPA is reauthorized, the producers of asparagus and, in particular, asparagus for processing will likely face some continued displacement from imports, but consumers can expect continued benefits from the year- round availability of fresh asparagus. However, some of this displacement will likely occur even if ATPA is not reauthorized and the normal tariff is imposed: 5 percent in 2 of the 5 months when the majority of Peru's asparagus is imported, and 21.3 percent in the other 3 months. This is because U.S. consumers prefer fresh asparagus, which domestic producers cannot supply in some months, and because of Peru's advantages in climate and labor costs. In addition, consumers would likely face decreased availability and pay higher prices than they would otherwise to the extent that the increase in tariff creates a reduction in imports from Peru and hence an overall reduction in asparagus supply. U.S. asparagus producers will also face increasing competition from Mexican imports under the North American Free Trade Agreement. In the longer term, the Free Trade Area of the Americas, currently being negotiated, could go beyond both NAFTA and ATPA by creating a duty- free trade zone in the Western Hemisphere for many products, including asparagus. If ATPA is reauthorized, U.S. asparagus producers, particularly of processed asparagus, will likely face some continued displacement from imports because the removal of tariffs on imports under ATPA allows fresh asparagus to be imported year-round. Since consumers tend to prefer fresh rather than processed asparagus when it is available, this displacement will likely continue. Consumers can expect continued benefits from this year-round availability of fresh asparagus. Peruvian asparagus enters the United States when domestic production is low, resulting in an increased supply of fresh asparagus in the marketplace. This extended product availability is believed to be partly responsible for increases in the consumption of fresh asparagus and declines in the consumption of processed asparagus. As shown in figure 6, the consumption of fresh asparagus reached 250 million pounds in 1999--representing a 103-million-pound, or 70-percent, increase since 1990. In contrast, the consumption of processed asparagus declined by 39 million pounds, or 37 percent, since 1990. Peruvian asparagus will likely remain a strong competitor for domestic producers even if ATPA is not reauthorized and the normal tariff is restored--5 percent in 2 of the 5 months when the majority of Peru's fresh asparagus is imported and 21.3 percent in the other 3 months. This is because U.S. consumers have expressed a preference for fresh rather than processed asparagus when it is available in the marketplace. In addition, Peru's climate allows for the year-round production and export of fresh asparagus. Peru also enjoys relatively lower labor costs for this labor- intensive crop. These advantages have allowed Peru to become the world's second largest producer of asparagus over the past decade and have given Peru the potential for increasing exports in the future. In addition, Peruvian growers began a marketing promotion program in 2000 to stimulate U.S. consumers' purchases of fresh asparagus. Without ATPA, consumers would likely have decreased year-round availability of fresh asparagus and pay higher prices to the extent that the increase in tariff creates a reduction in imports from Peru. Since fresh asparagus would not be readily available from other foreign producers, supplies would decrease, and consumer prices would likely rise. Regardless of what happens with the reauthorization of ATPA, U.S. asparagus producers will face increasing competition from other current and future trade agreements. In the near term, Mexico continues to be the most important source of imported fresh asparagus. Mexico's advantage of lower transportation costs to U.S. markets is believed to offset any production advantages in ATPA countries. In addition, Mexico's sizable shipments to the United States have occurred despite relatively high tariffs. As tariff rates under NAFTA are phased out through 2008, asparagus imports from Mexico will become even more competitive. Over the longer term, negotiations are under way to create a free trade zone among the 34 democracies of the Western Hemisphere. The Free Trade Area of the Americas could create a duty-free trade zone more extensive than both ATPA and NAFTA, which would result in the elimination of tariffs on many products, including asparagus, according to the U.S. Trade Representative. China, the world's largest producer of asparagus, has been granted normal trade relations trading status by the United States, resulting in lower tariffs. As a result, China has begun increasing its exports of processed asparagus to the United States. U.S. trade law contains several provisions under which domestic industries may seek relief from injury caused by foreign imports.According to asparagus industry representatives, asparagus producers have not pursued relief under any of these provisions because the cost of bringing a case to ITC is considered too burdensome for such a small industry. Alternatively, industry representatives have proposed that the Andean Trade Preference Act be amended to remove duty-free treatment for asparagus when an ATPA country is deemed to be economically competitive with U.S. producers. Under section 201 of the Trade Act of 1974, domestic industries can petition ITC to investigate whether increased imports have caused them serious injury or threat of serious injury. Upon receiving a petition, ITC conducts an investigation to substantiate the allegation. ITC's investigation is designed to determine whether a product is being imported into the United States in such increased quantities as to be a substantial cause of serious injury or threat of serious injury to the domestic industry. In making its determination, the Commission must consider all relevant economic factors, including whether (1) productive facilities in the industry have been significantly idled, (2) a significant number of firms have been unable to operate at a reasonable level of profit, and (3) significant unemployment or underemployment has occurred within the industry. ITC also considers, among other things, whether there is a decline in sales or market share; a higher and growing inventory of the product; and a downward trend in production, profits, wages, productivity, or employment in the industry. In addition, the Commission must consider imports from all sources. There is no requirement that the increases in imports or serious injury to a domestic industry be attributable to an unfair trade practice. If ITC makes an affirmative injury determination, it is required to recommend to the President an action that would be most effective in addressing the injury. Recommended actions may include increased tariffs, quotas, trade adjustment assistance to workers (such as job training), or a combination of these measures. As part of its recommendation, ITC must also state whether and to what extent its findings and recommendations apply to imports from ATPA countries. Following the receipt of ITC's recommendations, the President may take one of several actions. These include taking (1) the action recommended by ITC, (2) other action deemed appropriate, or (3) no action. However, the President cannot take action that is solely in the form of suspension of duty-free treatment for ATPA imports unless the Commission's investigation has found that the serious injury or threat of serious injury to the domestic industry resulted from the duty-free treatment. In any event, the President is required to report to the Congress what action, if any, he intends to make. If the President takes action that differs from ITC's recommendation or takes no action, the Congress may enact a joint resolution, which directs that he proclaim the action recommended by ITC. The trade act also authorizes ITC to make preliminary determinations and recommendations to the President for provisional relief in two situations. Under the first situation, an industry producing a perishable agricultural commodity that has already petitioned ITC and is undergoing a section 201 investigation, may file a request with the U.S. Trade Representative for the monitoring of imports. The U.S. Trade Representative may then request that ITC monitor imports. If an ITC monitoring investigation has been under way for at least 90 days, then the industry producing the domestic product may request, in a section 201 petition with respect to imports of the monitored product, that a remedy be applied on a provisional basis, pending completion of a full section 201 investigation and presidential review. ITC would have 21 days to make a recommendation concerning provisional relief, and the President would have 7 days to make a decision. Any provisional relief granted by the President upon ITC's recommendation would generally be in the form of increased tariffs. Under a second situation, an industry filing a section 201 petition may request provisional relief if it believes critical circumstances exist. Such circumstances exist when clear evidence shows that increased imports are a substantial cause of serious injury or threat of serious injury to the domestic industry and delay in taking action would cause damage that would be difficult to repair. ITC would have 60 days to make a critical circumstances determination and make a recommendation, and the President would have 30 days to decide what, if any, action to take. Such an action would generally be in the form of a tariff increase. In addition, ATPA specifically provides that an industry filing a section 201 petition with ITC can then also petition the Secretary of Agriculture for provisional relief. Under the ATPA special emergency relief provision, the Secretary of Agriculture and the President are authorized to make speedier determinations when an investigation of a perishable agricultural product under the trade act is ongoing. If the Secretary of Agriculture's determination is affirmative, the President may temporarily withdraw the product's duty-free treatment or take no action. No preexisting monitoring investigation by ITC is required. The Secretary and President have a total of 21 days to make their final determination. The emergency action would be rescinded upon a negative determination of ITC's investigation, a presidential determination of changed circumstances, or the decision to take another relief action. To date, asparagus producers have not petitioned ITC for an investigation based on allegations of serious injury from imports under ATPA. According to industry representatives, the cost associated with preparing a case is burdensome, especially for such a small industry. Alternatively, industry representatives, in comments submitted to the U.S. Trade Representative on the operation of ATPA in 1997, have requested that the law be amended to remove duty-free treatment for asparagus when an ATPA country is deemed to be economically competitive with U.S. producers. Without a petition from the industry, the ITC has not initiated an investigation. We provided USDA's Economic Research Service and Foreign Agricultural Service, staff from the U.S. International Trade Commission, and the U.S. Trade Representative with a draft copy of this report for their review and comment. We met with Economic Research Service agricultural economists, including the Team Leader for Fruit and Vegetable Analysis; ITC's staff representing the Offices of External Relations, Economics, Industries, and General Counsel; and U.S. Trade Representative officials, including the Deputy Assistant U.S. Trade Representative for Latin America. They generally agreed with the substance of the report and provided technical and clarifying comments, which we incorporated as appropriate. In a letter commenting on the report, USDA's Foreign Agricultural Service stated that the report does not adequately address the congressional rationale for providing duty-free access for asparagus imports under ATPA. The Foreign Agricultural Service stated that it does not believe that Peruvian asparagus production provides an alternative economic opportunity for coca producers and workers--the stated purpose for the trade act. Determining whether ATPA is meeting its intended purpose of providing alternative economic opportunities for coca producers and workers in the four Andean countries was beyond the scope of our review. However, our report does describe how asparagus production has contributed to economic development in Peru. The Foreign Agricultural Service also commented that the data we used in our draft report did not adequately reflect the current impact of Peruvian asparagus imports on the U.S. market. The 1999 quantity and value of domestic asparagus production data that we used to prepare our draft report were the most current available at the time of our review. Subsequently, in January 2001, USDA's National Agricultural Statistics Service released its Vegetables 2000 Summary report. We updated our draft with the production information from that report. The updated information did not alter the results of our analyses. Appendix III presents the Foreign Agricultural Service's comments on the report and our detailed response. We conducted our review from September 2000 through February 2001 in accordance with generally accepted government auditing standards. Appendix I discusses our scope and methodology. Copies of this report are being sent to interested congressional committees; the Honorable Steve Koplan, U.S. International Trade Commission; Ambassador Robert B. Zoellick, U.S. Trade Representative; the Honorable Ann Veneman, Secretary of Agriculture; and other interested parties. We will make copies available to others upon 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 Robert C. Summers, Carol E. Bray, and John C. Smith. To determine the impact that the Andean Trade Preference Act (ATPA) has had on domestic asparagus producers and consumers and the likely impact of its reauthorization, we interviewed and obtained information from representatives from the federal government, asparagus producers' associations, and research institutions. Specifically, we obtained and reviewed the annual reports prepared by the U.S. International Trade Commission (ITC) on ATPA's impact on U.S. industries and consumers and interviewed ITC staff about the basis for their conclusions. We also obtained and reviewed the model used by ITC to analyze ATPA's effect on the U.S. economy. We obtained and reviewed reports from the Office of the U.S. Trade Representative (USTR) on ATPA's operation and interviewed officials concerning its impacts. We analyzed domestic and international asparagus production and marketing data provided by the U.S. Department of Agriculture's Economic Research Service and Foreign Agricultural Service. In addition, we obtained production and marketing information from representatives of the California Asparagus Commission, Michigan Asparagus Advisory Board, Washington Asparagus Commission, and Peruvian Asparagus Institute. We reviewed studies on trade impacts from the University of California-Davis and obtained and reviewed two econometric models from Washington State University that investigated prices, production, and income in the U.S. asparagus industry. We adjusted prices in this report to 1999 dollars using the Gross Domestic Product implicit price deflator to more accurately compare prices and costs over time. Data on U.S. asparagus production and values are as of December 2000. All other data used in the report are as of December 1999, the most current available at the time of our review. To describe the trade remedies available to domestic industries adversely affected by imports under ATPA, we reviewed the applicable provisions of ATPA and other U.S. trade legislation, and interviewed officials from ITC and USTR. We also interviewed representatives of asparagus trade associations in California, Michigan, and Washington to determine their use of these remedies. We conducted our review from September 2000 through February 2001 in accordance with generally accepted government auditing standards. The following are GAO's comments on the letter from the U.S. Department of Agriculture's Foreign Agricultural Service dated March 2, 2001. 1. We do not agree. Determining whether ATPA is meeting its intended purpose of providing alternative economic opportunities for coca producers and workers in the four Andean countries was beyond the scope of our review. However, our report does describe how asparagus production has contributed to economic development in Peru. 2. We disagree. The report provides information on both the fresh and processed sectors of the U.S. asparagus industry from 1990 to 2000. For example, figures 1, 4, 5, and 6 contain information on fresh and processed asparagus. 3. We disagree. As we reported in figure 5, the inflation-adjusted prices for fresh asparagus have trended upward from 1990 through 2000 while prices for processed asparagus remained relatively flat during this same period. 4. See comment 1. 5. ITC's most recent study estimates that ATPA displaced an estimated 2 to 8 percent of the total value of domestic fresh asparagus production from what it would have been without the act. The 1999 data used for their study were the most current information available at the time of their analysis. 6. We agree. The scope of our work did not include evaluating the economic impact on domestic growing regions. 7. We disagree. The quantity and value of domestic asparagus production data for 1999 that we used to prepare our draft report were the most current available at the time of our review. Subsequently, in January 2001, the Department of Agricultures's National Agricultural Statistics Service released its Vegetables 2000 Summary report. We updated our draft with the production information from that report. The updated information did not alter the results of our analyses.

U.S. asparagus imports increased in the 1990s and now comprise nearly one-half of the asparagus consumed in the United States. Peru is the second largest source of imported asparagus and benefits from duty-free treatment under the Andean Trade Preference Act (ATPA). ATPA is estimated to have displaced between two and eight percent of the value of domestic production from what it would have been without the act. Although the supply of fresh asparagus from imports has increased since ATPA's enactment, consumer demand has been strong, and prices have risen. In addition, an apparent increase in consumer preference for fresh asparagus has contributed to a downward shift in the domestic demand for processed asparagus. Most of the decline in the domestic production of processed asparagus occurred in Michigan and Washington, the two states that produce most canned and frozen asparagus. If ATPA is reauthorized, domestic producers of asparagus and, in particular, asparagus for processing, will likely face continued displacement, but consumers can expect continued benefits from the year-round availability of fresh asparagus. However, some of this displacement will likely occur even if ATPA is not reauthorized and the normal tariff is imposed. If ATPA is not reauthorized, consumers would likely have decreased availability and pay higher prices to the extent that tariff increases reduce Peruvian asparagus imports and hence total asparagus supplies. Domestic industries can petition the U.S. International Trade Commission to investigate whether increased imports under the ATPA have caused them serious injury or threat of serious injury. If the Commission finds serious injury, it may recommend relief options to the President, including suspending duty-free treatment for imports.

The IDES process begins at a military treatment facility when a physician identifies one or more medical conditions that may interfere with a servicemember's ability to perform his or her duties. The process involves four main phases: the Medical Evaluation Board (MEB), the Physical Evaluation Board (PEB), transition out of military service (transition), and VA benefits. MEB phase: In this phase, medical examinations are conducted and decisions are made by the MEB regarding a servicemember's ability to continue to serve in the military. This phase involves four stages: (1) the servicemember is counseled by a DOD board liaison on what to expect during the IDES process; (2) the servicemember is counseled by a VA caseworker on what to expect during the IDES process and medical exams are scheduled; (3) medical exams are conducted according to VA standards for exams for disability compensation, by VA, DOD, or contractor physicians; and (4) exam results are used by the MEB to identify conditions that limit the servicemember's ability to serve in the military. Also during this stage, a servicemember dissatisfied with the MEB assessment of unfitting conditions can seek a rebuttal, or an informal medical review by a physician not on the MEB, or both. PEB phase: In this subsequent phase, decisions are made about the servicemember's fitness for duty, disability rating and DOD and VA disability benefits, and the servicemember has opportunities to appeal those decisions. This includes: (1) the informal PEB stage, an administrative review of the case file by the cognizant military branch's PEB without the presence of the servicemember; (2) VA rating stage, where a VA rating specialist prepares two ratings--one for the conditions that DOD determine made a servicemember unfit for duty, which DOD uses to provide military disability benefits, and the other for all service- connected disabilities, which VA uses to determine VA benefits. In addition, the servicemember has several opportunities to appeal different aspects of their disability evaluations: a servicemember dissatisfied with the decision on whether he or she is fit for duty may request a hearing with a "formal" PEB; a member who disagrees with the formal PEB fitness decision can, under certain conditions, appeal to the reviewing authority of the PEB; and a servicemember can ask for VA to reconsider its ratings decisions based on additional evidence, though only for conditions found to render the servicemember unfit for duty. Transition phase: If the servicemember is found unfit to serve, he or she enters the transition phase and begins the process of separating from the military. During this time, the servicemember may take accrued leave. Also, DOD board liaisons and VA case managers provide counseling on available benefits and services, such as job assistance. VA benefits phase: A servicemember found unfit and separated from service becomes a veteran and enters the VA benefits phase. VA finalizes its disability rating after receiving evidence of the servicemember's date of separation from military service. VA then starts to award monthly disability compensation to the veteran. DOD and VA established timeliness goals for the IDES process to provide VA benefits to active duty servicemembers within 295 days of being referred into the process, and to reserve component members within 305 days (see fig. 1). DOD and VA also established interim timeliness goals for each phase and stage of the IDES process. These time frames are an improvement over the legacy disability evaluation system, which was estimated to take 540 days to complete. In addition to timeliness, DOD surveys servicemembers on their satisfaction at several points in the process, with a goal of having 80 percent of servicemembers satisfied. Enrollment in IDES continued to grow as IDES completed its worldwide expansion. In fiscal year 2011, 18,651 cases were enrolled in IDES compared to 4,155 in fiscal year 2009 (see fig 2). IDES caseload varies by service, but the Army manages the bulk of cases, accounting for 64 percent of new cases in fiscal year 2011. Additionally, active duty servicemembers represent the majority of IDES cases, accounting for 88 percent of new cases in fiscal year 2011. Overall IDES timeliness has steadily worsened since the inception of the program. Since fiscal year 2008, the average number of days for servicemembers cases to be processed and to receive benefits increased from 283 to 394 for active duty cases (compared to the goal of 295 days) and from 297 to 420 for reserve cases (compared to the goal of 305 days). Relatedly, the proportion of cases meeting timeliness goals decreased from more than 63 percent of active duty cases completed during fiscal year 2008 to about 19 percent in fiscal year 2011 (see table 1). When examining timeliness across the four phases that make up IDES, data show that timeliness regularly fell short of interim goals for three-- MEB, Transition, and VA Benefits (see fig. 3). For example, for cases that completed the MEB phase in fiscal year 2011, active and reserve component members' cases took on average of 181 and 188 days respectively to be processed, compared to goals of 100 and 140 days. For the PEB phase, processing times increased over time, but were still within established goals. MEB phase: Significant delays have been occurring in completing medical examinations (medical exam stage) and delivering an MEB decision (the MEB stage). For cases completing the MEB phase in 2011, 31 percent of active and 29 percent of reserve cases met the 45-day goal for the medical exam stage and 20 percent of active case and 17 percent of reserve cases met the 35-day goal for the MEB stage. Officials at some sites we visited told us that MEB phase goals were difficult to meet and not realistic given current resources. At all the facilities we visited, officials told us DOD board liaisons and VA case managers had large case loads. Similarly, some military officials noted that they did not have sufficient numbers of doctors to write the narrative summaries needed to complete the MEB stage in a timely manner. Monthly data produced by DOD subsequent to the data we analyzed show signs of improved timeliness for these two stages: for example, 71 percent of active cases met the goal for the medical exam stage and 43 percent met the goal for the MEB stage in the month of March 2012. However, it is too early to tell the extent to which these results will continue to hold. PEB phase: PEB processing times goals were also not met in fiscal year 2011 for the informal PEB and VA rating stages. For cases that complete the PEB phase in fiscal year 2011, only 38 percent of active duty cases received an informal PEB decision within the 15 days allotted, and only 32 percent received a preliminary VA rating within the 15-day goal. Also during this phase, the majority of time (75 out of the 120 days) is set aside for servicemembers to appeal decisions--including a formal PEB hearing or a reconsideration of the VA ratings. However, only 20 percent of cases completed in fiscal year 2011 actually had any appeals; calling into question DOD and VA's assumption on the number of expected appeals and potentially masking processing delays in other mandatory parts of the PEB phase. Transition phase: The transition phase has consistently taken longer than its 45-day goal--almost twice as long on average. While processing times improved slightly for cases that completed this phase in fiscal year 2011 (from 79 days in 2010 to 76 days in fiscal year 2011 for active duty cases), timeliness has remained consistently problematic since fiscal year 2008. DOD officials suggested that it is difficult to meet the goal for this phase because servicemembers are taking accrued leave--to which they are entitled--before separating from the service. For example, an Army official said that Army policy allows servicemembers to take up to 90 days of accrued leave prior to separating, and that average leave time was about 80 days. Although servicemember leave is skewing the performance data, officials said that they cannot easily back this time out from their tracking system, but are exploring options for doing so, which would be more reflective of a servicemember's actual total time spent in the evaluation process. VA benefits phase: Processing time improved somewhat for the benefits phase (48 days in fiscal year 2010 to 38 days in fiscal year 2011), but continued to exceed the 30-day goal for active duty servicemembers. Several factors may contribute to delays in this final phase. VA officials told us that cases cannot be closed without the proper discharge forms and that obtaining these forms from the military services can sometimes be a challenge. Additionally, if data are missing from the IDES tracking system (e.g., the servicemember already separated, but this was not recorded in the database), processing time will continue to accrue for cases that remain open in the system. Officials could not provide data on the extent to which these factors had an impact on processing times for pending cases, but said that once errors are detected and addressed, reported processing times are also corrected. In addition to timeliness, DOD and VA evaluate IDES performance using the results of servicemember satisfaction surveys. However, shortcomings in how DOD measures and reports satisfaction limit the usefulness of these data for making IDES management decisions. Response rates: Survey administration rules may unnecessarily exclude the views of some servicemembers. In principle, all members have an opportunity to complete satisfaction surveys at the end of the MEB, PEB, and transition phases; however, servicemembers become ineligible to complete a survey for either the PEB or transition phases if they did not complete a survey in an earlier phase. Additionally, by only surveying servicemembers who completed a phase, DOD may be missing opportunities to obtain input from servicemembers who exit IDES in the middle of a phase. Alternate measure shows lower satisfaction: DOD's satisfaction measure is based on an average of responses to questions across satisfaction surveys. A servicemember is defined as satisfied if the average of his or her responses is above 3 on a 5-point scale, with 3 denoting neither satisfied nor dissatisfied. Using an alternate measure that defines servicemembers as satisfied only when all of their responses are 4 or above, GAO found satisfaction rates several times lower than DOD's calculation. Whereas DOD's calculation results in an overall satisfaction rate of about 67 percent since the inception of IDES, GAO's alternate calculation resulted in a satisfaction rate of about 24 percent. In our ongoing work, we will continue to analyze variation in satisfaction across servicemember cases using both DOD's and GAO's measures of satisfaction. In our ongoing work, we will continue to assess survey results and their usefulness for measuring performance. In the meantime, DOD is reconsidering alternatives for measuring satisfaction, but has yet to come to a decision. Officials already concluded that the survey, in its current form, is not a useful management tool for determining what changes are needed in IDES and said that it is expensive to administer--costing approximately $4.3 million in total since the start of the IDES pilot. DOD suspended the survey in December 2011 because of financial constraints, but officials told us they plan to resume collecting satisfaction data in fiscal year 2013. DOD and VA have undertaken a number of actions to address IDES challenges--many of which GAO identified in past work. Some actions-- such as increased oversight and staffing--represent important steps in the right direction, but progress is uneven in some areas. Increased monitoring and oversight: GAO identified the need for agency leadership to provide continuous oversight of IDES in 2008, and reported the need for system-wide monitoring mechanisms in 2010. Since then, agency leadership has established mechanisms to improve communication, monitoring, and accountability. The secretaries of DOD and VA have met several times since February 2011 to discuss progress in improving IDES timeliness and have tasked their agencies to find ways of streamlining the process so that the goals can be reduced. Further, senior Army and Navy officials regularly hold conferences to assess performance and address performance issues, including at specific facilities. For instance, the Army's meetings are led by its vice-chief of staff and VA's chief of staff, and include reviews of performance where regional and local facility commanders provide feedback on best practices and challenges. Further, VA holds its own biweekly conferences with local staff responsible for VA's portion of the process. For example, officials said a recent conference addressed delays at one Army IDES site and discussed how they could be addressed. VA officials noted that examiner staff were reassigned to this site and examiners worked on weekends to address the exam problems at this site. Increased staffing for MEB and VA rating: In 2010, we identified challenges with having sufficient staff in a number of key positions, including DOD board liaisons and MEB physicians. DOD and VA are working to address staffing challenges in some of the IDES processes that are most delayed. The Army is in the midst of a major hiring initiative to more than double staffing for its MEBs over its October 2011 level, which will include additional board liaison and MEB physician positions. The Army also plans to hire contact representatives to assist board liaisons with clerical functions, freeing more of the liaisons' time for counseling servicemembers. Additionally, VA officials said that the agency has more than tripled the staffing of its IDES rating sites to handle the demand for preliminary ratings, rating reconsiderations, and final benefit decisions. Resolving diagnostic differences: In our December 2010 report, we identified differences between DOD physicians and VA examiners, especially regarding mental health conditions, as a potential source of delay in IDES. We also noted inconsistencies among services in providing guidance and a lack of a tracking mechanism for determining the extent of diagnostic differences. In response to our recommendation, DOD commissioned a study on the subject. The resulting report confirmed the lack of data on the extent and nature of such differences, and that the Army has established guidance more comprehensive than guidance DOD was developing on how to address diagnostic differences, and recommended that DOD or the other services develop similar guidance. A DOD official told us that consistent guidance across the services, similar to the Army's, was included in DOD's December 2011 IDES manual. Also, in response to our recommendation, VA plans to modify the VTA database used to track IDES to collect this information on cases, although the upgrade has been delayed several times. DOD has other actions underway, including efforts to improve sufficiency of VA examinations, MEB written summaries and reserve component records. We plan to review the status of these efforts as part of our ongoing work, which we anticipate completing later in 2012. DOD and VA are working to address shortcomings in information systems that support the IDES process, although some efforts are still in progress and efforts to date are limited. Improving local IDES reporting capability: DOD and VA are implementing solutions to improve the ability of local military treatment facilities to track their IDES cases, but multiple solutions may result in redundant work efforts. Officials told us that the VTA--which is the primary means of tracking the completion of IDES cases--has limited reporting capabilities and staff at local facilities are unable to use it for monitoring the cases for which they are responsible. DOD and VA have been developing improvements to VTA that will allow board liaisons and VA case managers to track the status of their cases. VA plans to include these improvements in the next VTA upgrade, currently scheduled for June 2012. In the meantime, staff at many IDES sites have been using their own local systems to track cases and alleviate limitations in VTA. Further, the military services have been moving ahead with their own solutions. For instance, the Army has deployed its own information system for MEBs and PEBs Army- wide. Meanwhile, DOD has also been piloting its own tracking system at 9 IDES sites. As a result, staff at IDES sites we visited reported having to enter the same data into multiple systems. Improving IDES data quality: DOD is taking steps to improve the quality of data in VTA. Our analysis of VTA data identified erroneous or missing dates in at least 4 percent of the cases reviewed. Officials told us that VTA lacks adequate controls to prevent erroneous data entry, and that incorrect dates may be entered, or dates may not be entered at all, which can result in inaccurate timeliness data. In September 2011, DOD began a focused effort with the services to correct erroneous and missing case data in VTA. Officials noted that the Air Force and Navy completed substantial efforts to correct the issues identified at that time, but Army efforts continue. While improved local tracking and reporting capabilities will help facilities identify and correct erroneous data, keeping VTA data accurate will be an ongoing challenge due to a lack of data entry controls. DOD and VA are also pursuing options to allow the electronic transfer of case files between facilities. We are reviewing the status of this effort as part of our ongoing work. Based on concerns from the agencies' secretaries about IDES delays, DOD and VA have undertaken initiatives to achieve time savings for servicemembers. The agencies have begun a business process review to better understand how IDES is operating and identify best practices for possible piloting. This review incorporates several efforts, including, Process simulation model: Using data from site visits and VTA, DOD is developing a simulation model of the IDES process. According to a DOD official, this process model will allow the agencies to assess the impact of potential situations or changes on IDES processing times, such as surges in workloads or changes in staffing. Fusion diagram: DOD is developing this diagram to identify the various sources of IDES data--including VA claim forms and narrative summaries--and different information technology systems that play a role in supporting the IDES process. Officials said this diagram would allow them to better understand and identify overlaps and gaps in data systems. Ultimately, according to DOD officials, this business process review could lead to short- and long-term recommendations to improve IDES performance, potentially including changes to the different steps in the IDES process, performance goals, and staffing levels; and possibly the procurement of a new information system to support process improvements. However, a DOD official noted that these efforts are in their early stages, and thus there is no timetable yet for completing the review or providing recommendations to senior DOD and VA leadership. By merging two duplicative disability evaluation systems, IDES has shown promise for expediting the delivery of DOD and VA benefits to injured servicemembers and is considered by many to be an improvement over the legacy process it replaced. However, nearly 5 years after its inception as a pilot, delays continue to affect the system and their causes are not yet fully understood. Recent initiatives to better understand factors that lead to delays and remedy them are promising, however it remains to be seen what their effect will be. Given the persistent nature of IDES performance challenges, continued attention from senior agency leadership will be critical to ensure that delays are understood and remedied. We have draft recommendations aimed at helping DOD and VA further address challenges we identified, which we plan to finalize in our forthcoming report after fully considering both DOD and VA's comments. Chairman Murray and Ranking Member Burr, 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 Daniel Bertoni at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the individual named above, key contributors to this statement include Michele Grgich, Daniel Concepcion, Melissa Jaynes, and Greg Whitney. James Bennett, Joanna Chan, Douglas Sloane, Vanessa Taylor, Jeff Tessin, Roger Thomas, Walter Vance, Kathleen van Gelder, and Sonya Vartivarian provided key support. 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 2007, the DOD and VA have operated the IDESwhich combines what used to be separate DOD and VA disability evaluation processes and is intended to expedite benefits for injured servicemembers. Initially a pilot at 3 military treatment facilities, IDES is now DODs standard process for evaluating servicemembers fitness for duty and disability worldwide. In previous reports, GAO identified a number of challenges as IDES expanded, including staffing shortages and difficulty meeting timeliness goals. In this statement, GAO discusses initial observations from its ongoing review of the IDES, addressing two key topics: (1) the extent to which DOD and VA are meeting IDES timeliness and servicemember satisfaction performance goals, and (2) steps the agencies are taking to improve the performance of the system. To answer these questions, GAO analyzed IDES timeliness and customer satisfaction survey data, visited six IDES sites, and interviewed DOD and VA officials. This work is ongoing and GAO has no recommendations at this time. GAO plans to issue its final report later in 2012. Case processing times under the Integrated Disability Evaluation System (IDES) process have increased over time, and measures of servicemember satisfaction have shortcomings. Each year, average processing time for IDES cases has climbed, reaching 394 and 420 days for active and reserve component members in fiscal year 2011--well over established goals of 295 and 305 days, respectively. Also in fiscal year 2011, just 19 percent of active duty servicemembers and 18 percent of guard or reserve members completed the IDES process and received benefits within established goals, down from 32 and 37 percent one year prior. Of the four phases comprising IDES, the medical evaluation board phase increasingly fell short of timeliness goals and, within that phase, the time required for the military's determination of fitness was especially troubling. During site visits to IDES locations, we consistently heard concerns about timeframes and resources for this phase of the process. With respect to servicemember satisfaction with the IDES process, GAO found shortcomings in how these data are collected and reported, such as unduly limiting who is eligible to receive a survey and computing average satisfaction scores in a manner that may overstate satisfaction. Department of Defense (DOD) officials told us they are considering alternatives for gauging satisfaction with the process. DOD and Veterans Affairs (VA) have taken steps to improve IDES performance, and have other improvement initiatives in process, but progress is uneven and it is too early to assess their overall impact. VA increased resources for conducting disability ratings and related workloads. The Army is hiring additional staff for its medical evaluation boards, but it is too early to see the impact of these additional resources. DOD and VA are pursuing system upgrades so that staff and managers at IDES facilities can better track the progress of servicemembers' cases and respond to delays more quickly; however, multiple upgrades may be causing redundant work efforts. DOD officials also told us they have been working with the military services to correct case data that were inaccurately entered into VA's IDES tracking system, but have not yet achieved a permanent solution. Finally, DOD is in the early stages of conducting an in-depth business process review of the entire IDES process and supporting IT systems, in order to better understand how each step contributes to overall processing times and identify opportunities to streamline the process and supporting systems.

In 1996, we reported that military units then designated for early deployment faced many of the same chemical and biological defense problems that Gulf War veterans had experienced. During the Gulf War, units and individuals deployed to the theater without all of the chemical and biological detection, decontamination, and protective equipment needed to operate in a contaminated environment. Some units did not have sufficient quantities or the needed sizes of protective clothing, and chemical detector paper, and decontamination kits in some instances had passed their expiration dates. While the 6-month Operation Desert Shield buildup time allowed DOD to correct some of these problems, had chemical or biological weapons been used during this period, some units might have suffered significant, unnecessary casualties. We further reported that DOD's progress in chemical and biological research and development was slower than planned, training of Army and Marine Corps forces was inadequate, there was little evidence that joint training and exercises included chemical and biological defense elements, stocks of vaccines for biological agents were in short supply, and medical units lacked necessary chemical and biological defense equipment and training. We believe these deficiencies were a result of, and would not be corrected without, changes in emphasis on the part of senior military leadership. We have also reviewed DOD's ability to protect critical ports and airfields overseas. Although I cannot fully discuss our findings in this open hearing because of their sensitive nature, I can say that there are deficiencies in doctrine, policy, equipment, and training for the defense of critical ports and airfields. The Congress and DOD have taken action that has improved U.S. forces' ability to survive and operate if chemical and biological agents are used against them. For example, DOD has requested and the Congress has approved increased funding for chemical and biological defense. Numerous efforts are currently underway that should provide our servicemembers with new chemical and biological defense equipment and capabilities over the next 5 years. These include the production and fielding of improved protective masks, body garments, and systems to better detect biological and chemical agents. In addition, several commanders in chief recently increased their emphasis on various aspects of chemical and biological defense by, for example, increasing stocks of chemical defense equipment and incorporating more chemical and biological defense scenarios in major military exercises. Still, DOD must address remaining critical deficiencies that affect its ability to protect forces from chemical and biological attack. DOD's doctrine and policy are inadequate regarding responsibility for the chemical and biological defense of overseas airfields and ports critical to the deployment, reinforcement, and logistical support of U. S. forces in the event of a conflict. As a result, questions are unresolved regarding the provision of the force structure and equipment needed to protect these facilities. Also, unresolved doctrinal, policy, and equipment questions persist regarding the return of chemically or biologically contaminated strategic lift aircraft and ships and the protection of both essential and nonessential civilians in high-threat areas overseas. Moreover, DOD has insufficient quantities of biological agent vaccines to protect U.S. forces, and servicemembers deployed in high-threat areas overseas normally have no biological agent detection capability. Also, collective protection facilities and equipment and agent detection systems are generally insufficient to protect the force. Anthrax is an infectious disease that afflicts certain animals, especially cattle and sheep. The anthrax vaccine was licensed by the Food and Drug Administration (FDA) in 1970 to protect veterinarians, meat packers, wool workers, and health officials who might come in contact with anthrax. (FDA licensure of a vaccine means that it has been tested and proven to be safe and effective in humans.) The vaccine has been routinely administered to populations at risk for several years. The Chairman of the Joint Chiefs of Staff considers anthrax to be the greatest biological weapons threat to U.S. military forces. After a 3-year study, the Secretary of Defense concluded that vaccination is the safest way to protect U.S. forces against a threat that is 99-percent lethal to unprotected individuals. Accordingly, in December 1997, DOD announced plans to vaccinate all U.S. military personnel (including active, reserve, and national guard servicemembers) against the biological warfare agent anthrax. The Michigan Biologic Products Institute is under contract with DOD to supply the vaccine for the DOD immunization program. While the vaccine will be centrally procured, administering the vaccinations will be decentralized at multiple DOD facilities worldwide. Initially, DOD planned to begin administering the program in the summer of 1998 to about 165,000 servicemembers and DOD mission-essential personnel located in Southwest Asia and Northeast Asia, which are the areas with the greatest biological warfare threat from anthrax. Prior to beginning the immunizations, DOD wanted time to (1) perform testing of the vaccine to ensure its sterility, safety, potency, and purity; (2) implement a system to track personnel who receive the vaccinations; (3) approve plans to administer the immunizations and inform military personnel of the program; and (4) have the program reviewed by an independent expert. However, DOD accelerated the anthrax vaccination schedule. In March 1998, DOD began immunizing forces stationed in the Persian Gulf because of the possibility of hostilities occurring in that region. DOD plans to vaccinate the remaining active and reserve force over the next several years. In addition, DOD plans to decide whether the program should be extended to others, such as host nation personnel, civilian contractors, and dependents. In accordance with the FDA licensure regimen for this vaccine, DOD plans to provide an initial series of three vaccinations at 2-week intervals, a second series of three vaccinations at 6-month intervals, and annual booster vaccinations to maintain immunity against anthrax. DOD recognizes that immunizing the entire force with multiple vaccinations will be difficult and involves significant administrative and logistical issues. DOD's program will involve administering anthrax vaccinations to about 2.4 million personnel around the world--a total of about 14.4 million vaccinations for the current force. In addition, personnel entering military service will also be immunized. Thus, DOD envisions the program to continue indefinitely. To ensure that all servicemembers receive the required vaccinations, it is important for DOD to have accurate and reliable personnel data systems showing where all servicemembers are located, especially those deployed to overseas locations. Our work in examining the Operation Joint Endeavor medical surveillance program in Bosnia surfaced concerns about the accuracy of the deployment database used for determining which servicemembers required postdeployment medical assessments. More specifically, DOD officials expressed concerns about the accuracy of the DOD-wide database that was used to identify Air Force and Navy personnel who deployed to Bosnia. Air Force officials told us that the Air Force had supplied information to DOD's database on servicemembers it planned to deploy but that many of them never deployed and the database was not corrected. We were also told that data on servicemembers assigned to two Navy construction battalions that deployed to Bosnia did not appear in the database. DOD officials told us that they were concerned about the accuracy of the deployment database and planned to address the problem. Because DOD plans to administer anthrax vaccinations in a decentralized manner at multiple locations involving both operational and medical personnel, high-level commanders need to emphasize the importance of the program to ensure that it is carried out within the time schedule for administering the vaccinations. Careful attention to the administration of vaccines is critical because the vaccinations must be given at specific intervals over an 18-month period to achieve maximum protection. In the past, a lack of command emphasis hindered DOD's successful implementation of medical programs. For example, we found that the Army had not done many postdeployment medical assessments of active duty personnel who had deployed to Bosnia. We also found that assessments done were, on average, not done within the 30-day time frame DOD established. Our work disclosed that it took an average of 98 days to complete the assessments. In addition, the Bosnia medical surveillance plan also required servicemembers to undergo a tuberculin test at about 90 days following departure from the theater. Our work disclosed that the test took an average of 142 days. These problems occurred because command officials did not emphasize the importance of the assessments and medical personnel did not have the authority to require servicemembers to go to medical clinics for assessments. Reliance upon unit commanders to require servicemembers to get the assessments was not effective for the Bosnia deployment. Medical records documenting all care (including vaccinations) for servicemembers are essential for the delivery of high-quality medical care. DOD regulations require documentation in a servicemember's permanent medical record of all immunizations and visits made to health units. The Presidential Advisory Committee on Persian Gulf War Veterans' Illnesses and the Institute of Medicine reported problems concerning the completeness and accuracy of medical record-keeping during the Gulf War. Research efforts to determine the causes of what has become known as veterans' Gulf War illnesses have been hampered by, among other things, incomplete medical records showing immunizations and other health services provided to servicemembers while deployed. The Institute of Medicine characterized DOD's medical records as fragmented, disorganized, and incomplete. We tested the completeness of medical records for selected active duty Army servicemembers who had deployed under Operation Joint Endeavor. We found that many of the medical records were incomplete in that they lacked documentation on (1) medical surveillance assessments conducted, (2) tick-borne encephalitis vaccinations given, and (3) visits made to in-theater health units. More specifically, we found that 19 percent of the postdeployment in-theater medical assessments and 9 percent of the postdeployment home unit medical assessments were not documented in the medical records. These documentation problems were attributed to the fact that this was a paper-based system that relied upon servicemembers to hand carry assessment forms from the theater to their home unit, which maintained the permanent medical record. Regarding the documentation of tick-borne encephalitis vaccine in Bosnia, servicemembers deploying to regions where the threat of this disease was prevalent were given the choice of being inoculated with this investigational drug vaccine. We found that 141 (24 percent) of the 588 medical records reviewed for servicemembers who had received the vaccine lacked required documentation. Our tests of the completeness of the permanent medical records for servicemembers' visits made to battalion aid stations in Bosnia showed similar problems. Specifically, we found that there was no documentation in the medical records for 44 (29.3 percent) of the 150 visits we reviewed. Army officials mentioned that permanent medical records were still paper-based and that information was subject to being misfiled or lost. They also pointed out that servicemembers had deployed to the theater with only an abstract of their permanent medical records and that any medical documentation generated in the theater was to have been routed back to the servicemembers' home units for inclusion into their medical records. DOD officials told us that a solution to these documentation problems would be the development of a deployable, computerized patient record. DOD has a project underway to have a paperless computerized medical record for every active duty servicemember by fiscal year 2000. Without an adequate centralized monitoring system, DOD will not have reasonable assurances that the program is being implemented as planned. For Operation Joint Endeavor, DOD established a centralized database to track the services' progress in implementing its medical surveillance program. Medical units processing medical assessments were required to send copies of assessment forms to the DOD office maintaining the centralized database in the United States. In testing the completeness of the centralized database for in-theater and home unit postdeployment medical assessments conducted for 618 servicemembers, we found that the database understated the number of assessments done. More specifically, it omitted 12 percent of the in-theater medical assessments and 52 percent of the home unit medical assessments. DOD officials told us that they plan to use a new automated system for tracking implementation of the anthrax immunization program from locations around the world. The automated system is still being developed. To ensure that military personnel will receive vaccinations in a timely manner and to effectively manage the program, it is important for DOD to maintain an efficient inventory control system. This system is needed to ensure that (1) sufficient supplies of vaccines will be available at the various worldwide immunization sites; (2) vaccines that are older than their 1-year shelf life are destroyed; and (3) records of vaccines received, administered, and destroyed are kept to allow for monitoring and tracking. For the Bosnia deployment, DOD experienced problems in accounting for the inventory of the tick-borne encephalitis vaccine. DOD had to comply with strict FDA regulations regarding its use because it was still being tested as an investigational new drug. Regulations required DOD to fully account for vaccine inventories, including the number of doses administered and the number of doses destroyed. In the spring of 1996, officials from the U.S. Army Medical Research Institute of Infectious Diseases (USAMRIID) went to Bosnia to review the procedures being used to administer the tick-borne encephalitis vaccine. These officials found that no record of vaccine disposition was being maintained and recommended that all vaccination sites perform a physical inventory and maintain data on vaccines on hand, used, and destroyed. USAMRIID officials met with considerable resistance from some medical personnel responsible for administering the vaccine about the need to keep proper records. They told us that some of the personnel seemed more interested in administering the vaccine than in keeping necessary records. Our work on the Bosnia deployment in 1997 showed that the problems identified by USAMRIID had not been corrected. More specifically, DOD could not account for more than 3,000 (20 percent) of the total number of doses sent to Bosnia. Since our report was issued in April 1997, officials from the Office of the Army Surgeon General informed us that most of the missing doses had been destroyed and only 242 doses remained unaccounted for. In conclusion, we believe that DOD has moved in the right direction in increasing its emphasis on improving its chemical and biological defense capabilities. Increased emphasis by the commanders in chief in their areas of responsibility, a DOD-wide spending increase leading to increased numbers of fielded chemical and biological detection and protective equipment, and planned procurements of equipment over the next several years will make U.S. forces better prepared to deal with chemical and biological weapons than in the past. However, greater diligence and more action is needed by DOD to maintain progress toward achieving a level of protection for our forces that will enable us to achieve wartime objectives. This latest initiative to immunize the forces against anthrax represents a clear recognition of this threat to U.S. servicemembers. But DOD must overcome past deficiencies in its medical record-keeping practices and make sure supplies of vaccine are available if this new program is to be successful. In this regard, we reiterate that DOD needs to have the means to (1) identify those servicemembers that require immunization, (2) ensure sufficient command emphasis to guarantee that those identified for immunization are immunized, (3) maintain an accurate medical record of immunizations for each servicemember, (4) manage large-scale immunizations through accurate central databases, and (5) ensure that vaccine inventories are appropriately controlled to ensure that sufficient supplies are on hand. This concludes my prepared remarks. We would be happy to respond to any questions the Committee may have. Gulf War Illnesses: Public and Private Efforts Relating to Exposures of U.S. Personnel to Chemical Agents (GAO/NSIAD-98-27, Oct. 15, 1997) . Combating Terrorism: Status of DOD Efforts to Protect Its Forces Overseas (GAO/NSIAD-97-207, July 21, 1997). Gulf War Illnesses: Improved Monitoring of Clinical Progress and Reexamination of Research Emphasis Are Needed (GAO/NSIAD-97-163, June 23, 1997). Defense Health Care: Medical Surveillance Improved Since Gulf War, but Mixed Results in Bosnia (GAO/NSIAD-97-136, May 13, 1997). Chemical and Biological Defense: Emphasis Remains Insufficient to Resolve Continuing Problems (GAO/NSIAD-96-103, Mar. 29, 1996). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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Pursuant to a congressional request, GAO discussed the Department of Defense's (DOD) continuing efforts to protect U.S. military forces against chemical and biological weapons, including its plan to inoculate all U.S. military forces against anthrax. GAO noted that: (1) in examining DOD's experience in preparing its forces to defend against potential chemical and biological agent attacks during the Gulf War, GAO identified numerous problems; (2) specifically, GAO found: (a) shortages in individual protective equipment; (b) inadequate chemical and biological agent detection devices; (c) inadequate command emphasis on chemical and biological capabilities; and (d) deficiencies in medical personnel training, and supplies; (3) while many deficiencies noted during the Gulf War remain unaddressed today, DOD has increasingly acknowledged and accepted the urgency of developing a capability to deal with the chemical and biological threat to its forces; (4) both Congress and DOD have acted to provide greater protection for U.S. forces; (5) their actions have resulted in increased funding, and the fielding of more and better chemical and biological defense equipment; (6) DOD must address remaining critical deficiencies if U.S. forces are to be provided with the resources necessary to better protect themselves; (7) DOD is now embarking on a major effort to protect U.S. forces from the threat of the deadly biological agent anthrax; (8) its program to immunize millions of active and reserve forces against anthrax, ensuring that each receives the prescribed vaccinations in the proper time sequence, will be a challenge; and (9) however, if DOD considers lessons learned from previous, smaller-sized immunization programs and from the medical record-keeping errors in the Gulf War and Bosnia in formulating detailed implementation plans, it can reduce the risks and improve the prospects for successfully managing the program.

IHS was established within the Public Health Service in 1955 to provide health services to members of AI/AN tribes primarily in rural areas on or near reservations. IHS provides these services directly through a network of hospitals, clinics, and health stations operated by IHS, and it also funds services provided at tribally operated IHS facilities. The federally operated system comprises 26 hospitals, 56 health centers, and 32 health stations in 33 states and received over 5 million outpatient visits and approximately 19,000 admissions in 2014. (See table 1.) Federally operated IHS hospitals range in size from 4 to 133 beds and are open 24 hours a day for emergency care needs. Health centers offer a range of care, including primary care services and at least some ancillary services, such as pharmacy, laboratory, and X-ray services, and they are open for at least 40 hours a week. Health stations offer only primary care services on a regularly scheduled basis and are open fewer than 40 hours a week. IHS oversees its health care facilities through a decentralized system of area offices, which are led by area directors and located in 12 geographic areas. (See fig. 1 for a U.S. map showing the IHS patient population by area). Nine of these 12 IHS areas have federally operated IHS facilities-- Albuquerque, Bemidji, Billings, Great Plains, Nashville, Navajo, Oklahoma City, Phoenix, and Portland. According to IHS, the headquarters office is responsible for setting health care policy, ensuring the delivery of quality comprehensive health services, and advocating for the health needs and concerns of AI/AN people. The IHS area offices are responsible for distributing funds to the facilities in their areas, monitoring their operation, and providing guidance and technical assistance. (See fig. 2). According to IHS, its mission to raise the physical, mental, social, and spiritual health of AI/AN people to the highest level cascades through every organizational level and individual in the agency. This cascading method of accountability is often used by health care organizations with a decentralized management structure and is recommended by the Office of Personnel Management (OPM) for agencies with clear organizational goals and objectives. In addition, in 2009 IHS developed four agency- wide priorities that serve as a strategic framework for improvement within the agency. One of these four priorities is to improve the quality of and access to care. In 2016, IHS established the following revised agency-wide priorities: assess care, improve delivery of services, address behavioral health issues, strengthen management, bring health care quality expertise to IHS, and engage local resources. IHS's oversight of the quality of care provided in its federally operated facilities has been limited and inconsistent. While some oversight functions are performed at the headquarters level, the agency has delegated primary responsibility for the oversight of the quality of care to the area offices. Area officials told us that the oversight they provide has generally included (1) holding periodic meetings with facility staff, such as governing board and other meetings; (2) reviewing available quality performance data; (3) reviewing data on adverse events occurring in their facilities; (4) monitoring compliance with facility certification and accreditation requirements; and (5) appraising employee performance. However, our review found that this oversight was limited and inconsistent across IHS areas and facilities, in part due to a lack of agency-wide quality performance standards and significant leadership turnover in some offices. Meeting with facility staff. Officials from all nine of the area offices that oversee federally operated IHS facilities told us that they monitor the quality of care provided by facilities through periodic meetings with facility staff--including governing board meetings and other meetings. However, according to area office officials, the frequency of these meetings varies widely by area. In general, these meetings are used to discuss a range of issues, such as quality of care, equipment problems, staff vacancies, and provider credentialing. For example, documentation of a governing board meeting with facility staff in the Phoenix area shows that board members and staff discussed a problem with the facility's wireless internet connection, which was negatively affecting their bar code medication administration (BCMA) system. A board member noted that these connectivity issues caused a patient safety risk, but another board member noted that they had a short-term resolution in place and area office officials were working with the wireless carrier to resolve the problem over the long- term. Area offices vary, however, as to whether, or to what extent, these meetings focus on the quality of care. For example, officials from one area office stated that their governing board meetings include a standardized agenda that includes quality of care items, and that facilities are required to submit data reports that include information on quality issues such as rates of hospital acquired infections, patient complaints, and provider productivity. In contrast, officials from another area office told us that there are no standing agenda items for the discussion of quality of care, and that facility staff set the meeting agendas based on issues they want to discuss. Furthermore, the frequency of governing board meetings with facility staff varied widely among the area offices, ranging from quarterly to annually. Reviewing available quality performance data. According to IHS officials, clinical quality performance data are generally collected and reported consistently to IHS's area and headquarters offices in response to requirements in the Government Performance and Results Act of 1993 (GPRA), but other data used to oversee the quality of care provided in facilities are not reported or reviewed consistently across IHS. Officials from all nine area offices in our review stated that they periodically review reports showing facility progress in meeting 24 annual GPRA clinical performance measure targets. These performance measures focus on health screening and prevention activities, such as cancer screening, immunization rates, and tobacco cessation activities, and do not include broader measures of quality, such as whether patients are receiving proper diagnoses and medications, and the extent to which facility staff properly perform infection control activities. Area officials reported that they review other quality performance data, such as the percentage of medication orders reviewed for therapeutic duplication, the number of mislabeled laboratory specimens, and patient satisfaction, but these data are not consistently obtained or reviewed by all area offices because IHS has not required that they be reviewed or reported. In addition, staff from the two facilities in our review told us that limitations of IHS's electronic health record system--the Resource and Patient Management System (RPMS)--also contribute to variation in the quality performance data that are collected and reported to area offices. For example, staff told us that certain data elements, such as patient diagnoses, are difficult to extract from RPMS. Officials from facilities and area offices said that pulling these data may require special modifications to RPMS. Officials said that modifying RPMS requires knowledge of computer programming and can be costly, so some facility staff may manually enter and extract certain data. Officials from several areas also told us that some facilities have hired contractors or purchased software to assist them in monitoring their data. One such software package--QlikView-- provides facility staff with multiple data reporting options. Staff from one facility said that, from an information technology standpoint, they face "massively complicated issues" when the lack of a standardized user interface leads to individual facilities across IHS customizing RPMS for their own needs. IHS officials told us that they are working on improving RPMS, in part, by developing software to stabilize the system; however, we have not assessed these efforts. Monitoring adverse events. Officials from all nine area offices told us that their oversight of the quality of care includes monitoring adverse events that occur at IHS facilities, such as medication errors or patient falls, and taking steps to prevent future adverse events. While all IHS facilities have the means to report and monitor adverse events through an IHS-wide web-based reporting tool--WebCident-- officials told us reporting adverse events through WebCident has been inconsistent. Officials from one area office stated that adverse events are not always reported through WebCident, and therefore the appropriate staff are often not notified when adverse events occur, including those resulting in patient harm. These officials stated that this creates a lost opportunity to address the deficiency and improve, as well as to hold individuals accountable. Officials from IHS headquarters reported that they plan to enhance this reporting system to encourage consistent use by facility staff, or replace it with a new system after January 2017. Monitoring compliance with facility certification and accreditation requirements. Officials from all nine area offices in our review told us that they monitor the ongoing compliance with certification and accreditation requirements of the facilities in their area--such as through mock surveys and other interim monitoring--to help ensure that they maintain their certification by CMS to participate in the Medicare and Medicaid programs, as well as their accreditation by accrediting bodies such as The Joint Commission and the Accreditation Association for Ambulatory Health Care (AAAHC). For example, documentation of a mock survey of a facility in the Phoenix area states that the facility emergency department was improperly storing contaminated medical instruments. In addition, documentation of a mock survey of a facility in the Albuquerque area states that the surveyors found defective lead aprons, as well as a high-voltage power line sitting on the floor instead of behind a wall, and exposed electrical wiring blocking the door and wrapped around a door handle--which the surveyors concluded could be a serious hazard. These findings underscore the need for such surveys, but the frequency with which these mock surveys have been conducted varies by area. Officials from one area office told us that they have conducted mock accreditation surveys of facilities in their area annually for the past 15 years. Officials from other area offices stated that they have recently begun performing such mock surveys. IHS officials told us that in May 2016, IHS began a system-wide mock survey initiative at all 26 federally operated hospitals to assess compliance with the CMS Conditions of Participation and readiness for reaccreditation. Surveys conducted by CMS and accrediting bodies are relatively infrequent, however, and this infrequency highlights the importance of interim monitoring. For instance, area office staff told us that The Joint Commission conducts site visits every 3 years, and, while CMS attempts to conduct site visits every 3 to 4 years, staff of one facility we visited stated that CMS had not surveyed the facility in 10 years. Appraising employee performance. According to IHS, area directors are held accountable for achieving agency-wide goals and specific performance objectives through an appraisal process that also enables these goals and objectives to cascade down to chief executive officers (CEO) at individual facilities and to all agency employees. Area directors sign performance agreements documenting their accountability. The fiscal year 2016 performance requirements included a provision on ensuring that all IHS operated health care facilities achieve and maintain accreditation or certification by a national health care organization in fiscal year 2016. The performance requirements also included a provision on quality care that requires documentation of the implementation of "at least two activities to improve wait times and access to quality health care for patients that are based on enhanced implementation of current quality initiatives or new quality initiatives and that have measurable goals, measures and outcomes," as well as improvements resulting from these efforts. However, area officials can choose activities to satisfy this requirement from a list of suggestions--such as improving customer service and expanding clinic hours--without directly addressing the quality of care in their facilities. These inconsistencies are exacerbated by significant turnover in area leadership. Officials from four of the nine area offices in our review reported that they had at least three area directors in the past 5 years, and officials from three area offices reported that they had at least three chief medical officers. (See fig. 3 and 4). Officials stated that inconsistent area office and facility leadership is detrimental to the oversight of facility operations and the supervision of personnel. For example, officials from multiple area offices told us that frequent leadership turnover can lead to instability in oversight initiatives if these initiatives are started but not completed. In addition, an area office's review of a facility in the Navajo area documented that the majority of facility staff interviewed felt that there were too many people in acting leadership positions, that acting leaders were afraid to commit to decisions, and that the leaders needed additional supervisory training. In addition, the facility staff interviewed stated that those in acting leadership positions had their own work to contend with and were not always responsive to the responsibilities of the leadership position. According to IHS officials, the agency has not defined contingency or succession plans for the replacement of key personnel, including area directors. See appendix I for additional information on leadership turnover within IHS. IHS's limited and inconsistent agency-wide oversight of the quality of care in its federally operated facilities, as well as its lack of contingency and succession plans for key personnel, is inconsistent with federal internal control standards. These standards suggest that agencies should establish and review performance standards and then monitor data to assess the quality of performance over time, and that agencies should define contingency and succession plans for key roles to help continue achieving objectives. As a result of IHS's lack of consistent agency-wide quality performance standards, as well as the significant turnover in area leadership, IHS officials cannot ensure that facilities are providing quality health care to their patients, and therefore that the agency is making steps toward fulfilling its mission to raise the physical, mental, social, and spiritual health of AI/AN people to the highest level. Recognizing some of the challenges it faces with overseeing and providing quality health care in its facilities, IHS finalized the development of a quality framework in November 2016 that outlines, at a high level, IHS's vision, goals, and priorities to develop, implement, and sustain an effective quality program that is intended to improve patient experience and ensure the delivery of reliably high quality health care for IHS direct service facilities. According to IHS, the priorities of the framework are to (1) strengthen organizational capacity to improve quality of care and systems, (2) meet and maintain accreditation for federally operated facilities, (3) align service delivery processes to improve patient experience, (4) ensure patient safety, and (5) improve transparency and communication regarding patient safety and quality to IHS stakeholders. While this framework is focused on initiatives related to improving the quality of care provided in its facilities--such as increasing staff training and technical assistance on achieving compliance with quality and safety standards, promoting a culture of patient safety, and developing a patient perception survey process--elements of the framework also describe IHS plans to improve oversight. For example, the framework directs IHS to establish a quality office that will be responsible for assessing area office and facility functions, staffing, and critical quality assurance activities. This quality office is to be developed as part of an overall realignment of offices in IHS, and according to the framework, the office will be responsible for identifying resource needs, structures, processes, and supports for an effective and sustainable quality assessment and performance improvement system. More specifically, the framework directs IHS to develop a process for monitoring performance measures, such as measures of clinical care, patient access, and financial performance, for periodic review by leadership. In addition, IHS's quality framework states that the agency will implement annual mock accreditation surveys for all federally operated facilities and develop a standardized governing board structure to improve planning and oversight processes. The framework says that "transparency and accountability will be fostered through regular and frequent (i.e., monthly or quarterly) communications" between offices. The framework also explains that IHS will enhance its adverse event reporting system to encourage consistent use by facility staff, or replace it with a new system after January 2017. If effectively implemented, the quality framework could address the limited and inconsistent oversight of the quality of care provided in federally operated IHS facilities. However, as of November 2016, the quality office had not yet been formed, and officials told us the agency's plan for realigning offices was out for tribal review and comment. In addition, IHS officials stated that the agency has not yet selected quality performance measures but has plans to do so. Furthermore, the quality framework states that IHS will support enhanced efforts to recruit and retain highly qualified executives. While IHS officials reported that they are implementing strategies to recruit and retain staff, the quality framework does not specifically mention contingency or succession plans for key personnel. American Indians and Alaska Natives die at higher rates than other Americans from many causes--such as lower respiratory infections and complications from diabetes--that can be mitigated through access to quality health care services, and concerns continue to be raised about the quality of care provided in federally operated IHS facilities, including misdiagnoses, incorrectly prescribed medications, and unsafe facility conditions. Despite IHS's mission to raise the physical, mental, social, and spiritual health of American Indians and Alaska Natives to the highest level, IHS's oversight of the quality of care in its federally operated facilities has been limited and inconsistent. In addition, several of the area offices in our review experienced frequent leadership turnover with no contingency or succession plans. While IHS has recognized the need for quality improvement and has drafted a quality framework to improve the oversight of the quality of care provided, it has not yet developed quality performance standards. Until IHS develops agency-wide standards for the quality of care provided in its federally operated facilities, systematically monitors facility performance in meeting these standards at all facilities, and develops contingency and succession plans for key personnel to address its significant leadership turnover, it cannot ensure that it is consistently providing quality medical care to the AI/AN population served in its facilities. To help ensure that quality care is provided to AI/AN people, the Secretary of HHS should direct the Director of IHS to take the following two actions: 1. As part of the implementation of its quality framework, ensure that agency-wide standards for the quality of care provided in its federally operated facilities are developed, that facility performance in meeting these standards is systematically monitored over time, and that enhancements are made to its adverse event reporting system. 2. Develop contingency and succession plans for the replacement of key personnel, including area directors. We provided a draft of this report to HHS for its review and comment. HHS provided written comments, which are reproduced in appendix II. HHS concurred with both of our recommendations. In its comments, HHS elaborated on steps that IHS has started taking to improve its oversight of the quality of care provided in its federally operated facilities, which we describe in our report. Specifically, HHS described the development of IHS's quality framework and quality office, plans to develop agency-wide quality measures, the standardization of governing board by-laws, plans to enhance or replace its adverse event reporting system, and its annual mock survey initiative. In its comments, HHS also described IHS's corrective action plan process related to the mock survey initiative, and we added this information to our report. HHS also provided information on steps that IHS is taking to improve the quality of care in its federally operated facilities, including steps taken toward the automation and systemization of provider credentialing. Regarding our second recommendation to develop contingency and succession plans for the replacement of key personnel, including area directors, HHS stated that IHS has already begun to address this recommendation. For instance, HHS reported that on December 2, 2016, IHS distributed succession planning instructions and descriptions of the competencies associated with each position in IHS headquarters, area offices, and facilities to all headquarters office directors and area directors. In addition, HHS reported that IHS has contingency plans in place to ensure continuity of operations in emergency situations. However, as explained in our report, standards for internal control in the federal government state that the agency should have contingency plans in place to respond to sudden personnel changes, which would include non-emergency situations as well. HHS also provided technical comments, which we incorporated where appropriate. We are sending a copy of this report to the Secretary of the Department of Health and Human Services. The report will be available at no charge on GAO's website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 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. Officials from some area offices in our review reported significant turnover of staff in area office leadership positions. Officials from four of the nine area offices in our review reported that they had at least three area directors in the past 5 years, and three area offices reported that they had at least three chief medical officers. See table 2. In addition, area offices reported 19 federally operated facilities that had 4 or more chief executive officers (CEO) in the past 5 years. One area reported that one of its hospitals had 10 CEOs and 6 clinical directors in the past 5 years. See table 3. In addition to the contact named above, Kristi Peterson, Assistant Director; Kelly DeMots; Krister Friday; Keith Haddock; Lisa Rogers; Patricia Roy; Jennifer Whitworth; and Emily Wilson made key contributions to this report.

IHS is charged with providing health care to American Indian/Alaska Native (AI/AN) people who are members or descendants of 567 tribes. AI/AN people born today have a life expectancy that is 4.4 years lower than all races in the United States, and they continue to die at higher rates than other Americans from preventable causes. Concerns about the quality of care provided to AI/ANs in IHS facilities have been identified recently by federal officials and tribal members. GAO was asked to review how IHS oversees the quality of care provided in its facilities. This report examines IHS's oversight of the quality of care provided in its federally operated facilities. GAO reviewed policies and guidance related to quality of care in federally operated facilities and interviewed IHS officials at the headquarters level and all nine area offices with federally operated facilities. GAO also examined documents from governance meetings between area office and facility staff. The Indian Health Service's (IHS) oversight of the quality of care provided in its federally operated facilities has been limited and inconsistent. While some oversight functions are performed at the headquarters level, the agency has delegated primary responsibility for the oversight of care to nine area offices. Area officials stated that the oversight they provide has included, for example, holding periodic meetings with facility staff, reviewing available quality performance data and reviewing adverse events. However, GAO found that this oversight was limited and inconsistent across IHS facilities, due in part to a lack of agency-wide quality of care standards. Specifically, GAO found: variation in the frequency of governing board meetings and the extent to which quality was a standing agenda item at these meetings; limited and inconsistent reporting of quality data across IHS areas and facilities; and inconsistent reporting of adverse events at federally operated facilities. These inconsistencies are also exacerbated by significant turnover in area leadership. Officials from four of the nine area offices in our review reported that they each had at least three area directors in the past five years. According to IHS officials, the agency has not defined contingency or succession plans for the replacement of key personnel, including area directors. IHS's lack of agency-wide quality of care standards and lack of contingency and succession plans for key personnel are inconsistent with federal internal control standards. These standards suggest that agencies should establish and review performance standards and then monitor data to assess the quality of performance over time, and define contingency and succession plans for the replacement of key personnel to help IHS continue achieving its objectives. As a result, IHS officials cannot ensure that facilities are providing quality health care. Recognizing the challenges it faces with overseeing and providing quality health care in its facilities, IHS finalized the development of a quality framework in November 2016 that outlines, at a high level, IHS's plan to develop, implement, and sustain a quality program intended to improve patient experience and ensure the delivery of reliably high quality health care. For example, the framework directs IHS to develop a quality office that will be responsible for identifying resource needs, structures, processes, and supports for an effective and sustainable quality assessment and performance improvement system. More specifically, the framework directs IHS to develop a process for monitoring select performance measures, such as measures of clinical care, patient access, and financial performance, for periodic review by leadership. The framework also explains that IHS will enhance its current patient safety reporting systems to encourage consistent use by staff. If effectively implemented, the quality framework could address the limited and inconsistent oversight of the quality of care provided in federally operated IHS facilities. As of November 2016, IHS officials stated that the agency has not yet selected quality performance measures but has plans to do so. GAO recommends that the Secretary of the Department of Health and Human Services direct the Director of IHS to (1) as it implements its quality framework, ensure that agency-wide standards for the quality of care provided in its federally operated facilities are developed, that facility performance in meeting these standards is monitored over time, and that enhancements are made to its adverse event reporting system, and (2) develop contingency and succession plans for the replacement of key personnel. HHS concurred with GAO's recommendations.

VA provides medical services to various veteran populations--including an aging veteran population and a growing number of younger veterans returning from the military operations in Afghanistan and Iraq. VA operates approximately 170 VAMCs, 130 nursing homes, and 1,000 outpatient sites of care. In general, veterans must enroll in VA health care to receive VA's medical benefits package--a set of services that includes a full range of hospital and outpatient services, prescription drugs, and long-term care services provided in veterans' own homes and in other locations in the community. The majority of veterans enrolled in the VA health care system receive care in VAMCs and community-based outpatient clinics, but VA may authorize care through community providers to meet the needs of the veterans it serves. For example, VA may provide care through its Care in the Community (CIC) program, such as when a VA facility is unable to provide certain specialty care services, like cardiology or orthopedics. CIC services must generally be authorized by a VAMC provider prior to a veteran receiving care. In addition to the CIC program, VA may also provide care to veterans through the Veterans Choice Program, which was established through the Veterans Access, Choice, and Accountability Act of 2014 (Choice Act), enacted on August 7, 2014. Implemented in fiscal year 2015, the program generally provides veterans with access to care by non-VA providers when a VA facility cannot provide an appointment within 30 days or when veterans reside more than 40 miles from the nearest VA facility. The Veterans Choice Program is primarily administered using contractors, who, among other things, are responsible for establishing nationwide provider networks and scheduling appointments for veterans. The Choice Act created a separate account known as the Veterans Choice Fund, which cannot be used to pay for VA obligations incurred for any other program, such as CIC, without legislative action. The Choice Act appropriated $10 billion to be deposited in the Veterans Choice Fund. Amounts deposited in the Veterans Choice Fund are available until expended and are available for activities authorized under the Veterans Choice Program. However, the Veterans Choice Program activities are only authorized through fiscal year 2017 or until the funds in the Veterans Choice Fund are exhausted, whichever occurs first. As part of the President's request for funding to provide medical services to veterans, VA develops an annual budget estimate detailing the amount of services it expects to provide as well as the estimated cost of providing those services. VA uses the Enrollee Health Care Projection Model (EHCPM) to develop most of the agency's estimates of the budgetary needs to meet the expected demand for VA medical services. Like many other agencies, VA begins to develop these estimates approximately 18 months before the start of the fiscal year for which funds are provided. Different from many agencies, VA's Veterans Health Administration receives advance appropriations for health care in addition to annual appropriations. VA's EHCPM makes these projections 3 or 4 years into the future for budget purposes based on data from the most recent fiscal year. In 2012, for example, VA used actual fiscal year 2011 data to develop the budget estimate for fiscal year 2014 and the advance appropriation estimate for fiscal year 2015. Similarly, in 2013, VA used actual fiscal year 2012 data to update the budget estimate for fiscal year 2015 and develop the advance appropriation estimate for fiscal year 2016. Given this process, VA's budget estimates are prepared in the context of uncertainties about the future--not only about program needs, but also about future economic conditions, presidential policies, and congressional actions that may affect the funding needs in the year for which the estimate is made--which is similar to budgeting practices of other federal agencies. Further, VA's budget estimates are typically revised during the budget formulation process to incorporate legislative and department priorities as well as in response to successively higher level of reviews in VA and OMB. Each year, Congress provides funding for VA health care primarily through the following appropriation accounts: Medical Services, which funds, among other things, health care services provided to eligible veterans and beneficiaries in VA's medical centers, outpatient clinic facilities, contract hospitals, state homes, and outpatient programs on a fee basis. The CIC program is funded through this appropriation account. Medical Support and Compliance, which funds, among other things, the administration of the medical, hospital, nursing home, domiciliary, construction, supply, and research activities authorized under VA's health care system. Medical Facilities, which funds, among other things, the operation and maintenance of the Veterans Health Administration's capital infrastructure, such as costs associated with nonrecurring maintenance, utilities, facility repair, laundry services, and groundskeeping. Our preliminary work suggests that the higher-than-expected obligations identified by VA in April 2015 for VA's CIC program accounted for $2.34 billion (or 85 percent) of VA's projected funding gap of $2.75 billion in fiscal year 2015. These higher-than-expected obligations for the CIC program were driven by an increase in utilization of VA medical services across VA, reflecting, in part, VA's efforts to improve access to care after public disclosure of long wait times at VAMCs. VA officials expected that the Veterans Choice Program would absorb much of the increased demand from veterans for health care services delivered by non-VA providers. However, veterans' utilization of Veterans Choice Program services was much lower than expected in fiscal year 2015. VA had estimated that obligations for the Veterans Choice Program in fiscal year 2015 would be $3.2 billion, but actual obligations totaled only $413 million. Instead, VA provided a greater amount of services through the CIC program, resulting in total obligations of $10.1 billion, which VA officials stated were much higher than expected for that program in fiscal year 2015. According to VA officials, the lower-than-expected utilization of the Veterans Choice Program in fiscal year 2015 was due, in part, to administrative weaknesses, such as provider networks that had not been fully established, that slowed enrollment in the program and that VAMC staff lacked guidance on when to refer veterans to the program. The unexpected increase in CIC obligations in fiscal year 2015 exposed weaknesses in VA's ability to estimate costs for CIC services and track associated obligations. While VA officials first became concerned that CIC obligations might be significantly higher than projected in January 2015, they did not determine that VA faced a projected funding gap until April 2015--6 months into the fiscal year. They made this determination after they compared authorizations in the Fee Basis Claims System (FBCS)--VA's system for recording CIC authorizations and estimating costs for this care--with obligations in the Financial Management System (FMS)--the centralized financial management system VA uses to track all of its obligations, including those for medical services. In its 2015 Agency Financial Report (AFR), VA's independent public auditor identified the following issues as contributing to a material weakness in estimating costs for CIC services and tracking CIC obligations: VAMCs individually estimate costs for each CIC authorization and record these estimates in FBCS. This approach leads to inconsistencies, because each VAMC may use different methodologies to estimate the costs they record. Having more accurate cost estimates for CIC authorizations is important to help ensure that VA is aware of the amount of money it must obligate for CIC services. VAMCs do not consistently adjust estimated costs associated with authorizations for CIC services in a timely manner to ensure greater accuracy, and they do not perform a "look-back" analysis of historical obligations to validate the reasonableness of estimated costs. Furthermore, centralized, consolidated, and consistent monitoring of CIC authorizations is not performed. FBCS is not fully integrated with VA's systems for recording and tracking the department's obligations. Notably, the estimated costs of CIC authorizations recorded in FBCS are not automatically transmitted to VA's Integrated Funds Distribution, Control Point Activity, Accounting, and Procurement (IFCAP) system, a procurement and accounting system used to send budgetary information, such as obligations, to FMS. According to VA officials, because FBCS and IFCAP are not integrated, at the beginning of each month, VAMC staff must record in IFCAP estimated obligations for outpatient CIC services, and they use historical obligations for this purpose. Depending on the VAMC, these estimated obligations may be entered as a single lump sum covering all outpatient care or as separate estimated obligations for each category of outpatient care, such as radiology. Regardless of how they are recorded, the estimated obligations recorded in IFCAP are often inconsistent with the estimated costs of CIC authorizations recorded in FBCS. In fiscal year 2015, the estimated obligations that VAMCs recorded in IFCAP were significantly lower than the estimated costs of outpatient CIC authorizations recorded in FBCS. VA officials told us that they did not determine a projected funding gap until April 2015, because they did not complete their analysis of comparing estimated obligations with estimated costs until then. In addition, the Chief Business Office (CBO) within the Veterans Health Administration, which is responsible for developing administrative processes, policy, regulations, and directives associated with the CIC program, had not developed and implemented standardized and comprehensive policies for VAMCs, regional networks, and the office itself to follow when estimating costs for CIC authorizations and for monitoring authorizations and associated obligations. This contributed to the material weaknesses the independent public auditor identified in the AFR. The AFR and VA officials we interviewed stated that because CIC was consolidated under CBO in fiscal year 2015 pursuant to the Choice Act, CBO did not have adequate time to implement efficient and effective procedures for monitoring CIC obligations. To address the fiscal year 2015 projected funding gap, on July 31, 2015, VA obtained temporary authority to use up to $3.3 billion in Veterans Choice Program funds for obligations incurred for medical services from non-VA providers, whether authorized under the Veterans Choice Program or CIC, starting May 1, 2015 and ending October 1, 2015. Based on our preliminary work, Table 1 shows the sequence of events that led to VA's request for and approval of additional budget authority for fiscal year 2015. Our preliminary work also suggests that unexpected obligations for new hepatitis C drugs accounted for $0.41 billion of VA's projected funding gap of $2.75 billion in fiscal year 2015. Although VA estimated that obligations in this category would be $0.7 billion that year, actual obligations totaled about $1.2 billion. VA officials told us that VA did not anticipate in its budget the obligations for new hepatitis C drugs --which help cure the disease--because the drugs were not approved by the Food and Drug Administration until fiscal year 2014, after VA had already developed its budget estimate for fiscal year 2015. The new drugs costs between $25,000 and $124,000 per treatment regimen, and according to VA officials demand for the treatment was high. Officials told us that about 30,000 veterans received these drugs in fiscal year 2015. In October 2014, VA reprogrammed $0.7 billion within its medical services appropriation account to cover projected obligations for the new hepatitis C drugs, after VA became aware of the drugs' approval. However, in January 2015, VA officials recognized that obligations for the new hepatitis C drugs would be significantly higher by year end than they expected. VA officials told us that they assessed next steps and then limited access to the drugs to those veterans with the most severe cases of hepatitis C. In June 2015, VA requested statutory authority to transfer funds dedicated to the Veterans Choice Program to VA's medical services appropriation account to cover the projected funding gap. Our preliminary work indicates that VA has developed new processes to prevent funding gaps for fiscal year 2016 and future years by improving its ability to track obligations for CIC services and hepatitis C drugs. In August 2015, VA issued a standard operating procedure to all VAMCs for recording estimated costs for inpatient and outpatient CIC in FBCS. The procedure, among other things, stipulates that VAMCs are to base estimated costs on historical cost data provided by VA. In addition, VA developed a software patch--released in December 2015 to all VAMCs--that automatically generates estimated costs for CIC authorizations, thereby eliminating the need for VAMC staff to individually estimate costs and record them in FBCS. According to VA officials, these changes should result in more accurate estimated costs for CIC authorizations. However, VA officials told us that accurately estimating the cost of CIC authorizations is challenging because of several unknown factors, such as the number of times a veteran may seek treatment for a recurring condition. In November 2015, VA allocated funds for CIC and hepatitis C drugs to each VAMC. In addition, VA officials told us that to identify VAMCs that may be at risk for exhausting their funds before the end of the fiscal year, VA began tracking VAMCs' obligations for CIC and hepatitis C drugs through monthly reports. Officials from the Office of Finance within the Veterans Health Administration told us that once a VAMC had obligated its CIC and hepatitis C drug funds, it would have to request additional funds from VA. VA would, in turn, evaluate the validity of a VAMC's request and determine whether additional funds may be made available. This practice could limit veterans' access to CIC services or hepatitis C drugs in some locations. Officials told us that these steps are intended to reduce the risk of VAMCs obligating more funds than VA's budgetary resources allow. In November 2015, VA also issued a policy requiring VAMCs to identify and report on potentially inaccurate estimated costs for CIC authorizations recorded in FBCS and any discrepancies between estimated costs for CIC authorizations recorded in FBCS and the amount of estimated obligations recorded in FMS. According to VA officials, these discrepancies may signal a risk of VA under obligating funds for CIC, leaving VA potentially unable to pay for authorized care. VA's policy also requires VAMCs to address concerns identified by VAMCs in these reports--such as adjusting unreasonably low estimated costs for CIC authorizations and unreasonably low estimated obligations, to make the estimates more accurate. Under VA's new policy, network directors are required to certify monthly that the reports have been reviewed and concerns addressed. VA officials told us that these new processes are necessary to help prevent future funding gaps because of the deficiencies in VA's systems for tracking obligations, which we have described previously. Officials also told us that VA is exploring options for replacing IFCAP and FMS, which officials describe as antiquated systems based on outdated technology, and the department has developed a rough timeline and estimate of budgetary needs to make these changes. Officials told us that the timeline and cost estimate would be refined once concrete plans for replacing IFCAP and FMS are developed. Officials told us that replacing IFCAP and FMS is challenging due to the scope of the project and the requirement that the replacement system interface with various VA legacy systems, such as the Veterans Health Information Systems and Technology Architecture, VA's system containing veterans' electronic health records. However, as we have previously reported, VA has made previous attempts to update IFCAP and FMS that were unsuccessful. In October 2009, we attributed these failures to the lack of a reliable implementation schedule and cost estimates, among other factors, and made several recommendations aimed at improving program management. Our preliminary work indicates that VA updated its EHCPM to include data from the first 6 months of fiscal year 2015, reflecting increased health care utilization in that year, which VA officials told us will inform VA's budget estimate for fiscal year 2017 and advance appropriations request for fiscal year 2018. Without this change, VA would have used actual data from fiscal year 2014 to make its budget estimate and inform the President's budget request for fiscal years 2017 and 2018. However, as we have previously reported, while the EHCPM projection informs most of VA's budget estimate, the amount of the estimate is determined by several factors, including the President's priorities. Historically, the final budget estimate for VA has consistently been lower than the amount projected for modeled services. VA officials told us that they expect any difference between the fiscal year 2017 budget estimate and the amount projected by VA's model to be made up by greater utilization of the Veterans Choice Program. However, VA's authority to use Veterans Choice Program funds is only available through fiscal year 2017 or until the funds are exhausted, whichever occurs first. VA has also taken steps to help increase utilization of the Veterans Choice Program. VA issued policy memoranda to VAMCs in May and October 2015, requiring them to refer veterans to the program if timely care cannot be delivered by a VAMC, rather than authorizing care through the CIC program. With statutory authority, VA has also loosened restrictions on veterans' use of the Veterans Choice Program, eliminating the requirement that veterans must be enrolled in the VA health care system by August 2014 in order to receive care through the program. While data from November 2015 indicate that utilization of care under the Veterans Choice Program has increased, VA officials expressed concerns that utilization would not reach the levels projected for fiscal year 2016 because of continuing weaknesses in implementing the program. For example, in November 2015, VA's Office of Compliance and Business Integrity identified extensive noncompliance among VAMCs with VA's policies for implementing the Veterans Choice Program and recommended training for VAMC staff responsible for implementing the program. The office also recommended that VA establish internal controls to ensure compliance with VA's policies. As of January 2016, VA had not completed a plan for establishing these internal controls. Like other health care payers, VA faces uncertainties estimating the cost of emerging health care treatments--such as costly drugs to treat chronic diseases affecting veterans. VA, like other federal agencies, prepares its budget estimate 18 months in advance of the start of the fiscal year for which funds are provided. At the time VA develops its budget estimate, it may not have enough information to estimate the likely costs for health care services or these treatments with reasonable accuracy. However, by establishing appropriate internal controls, VA can help reduce the risks associated with the weaknesses in its budgetary projections and monitoring. Chairman Miller, Ranking Member Brown, and Members of the Committee, this concludes my statement for the record. If you or your staff members have any questions concerning this statement, please contact Randall B. Williamson, Director, Health Care, 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. GAO staff who made key contributions to this statement include Rashmi Agarwal, Assistant Director; Luke Baron; Krister Friday; Jacquelyn Hamilton; and Michael Zose. 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.

VA projected a funding gap in its fiscal year 2015 medical services appropriation account and obtained temporary authority to use up to $3.3 billion in Veterans Choice Program funding to close this gap. GAO was asked to examine VA's fiscal year 2015 projected funding gap and changes VA has made to help prevent potential funding gaps in future years. This statement is based on GAO's ongoing work and provides preliminary observations on (1) the activities or programs that accounted for VA's fiscal year 2015 projected funding gap in its medical services appropriation account and (2) changes VA has made to prevent potential funding gaps in future years. GAO reviewed data VA provided on its obligations and related documents to determine what activities accounted for the projected funding gap in its fiscal year 2015 medical services appropriation account, as well as the factors that contributed to the projected funding gap. GAO interviewed VA and Office of Management and Budget officials to identify the steps taken to address the projected funding gap. GAO also examined changes VA made to better track obligations and project future budgetary needs. GAO shared the information provided in this statement with VA and incorporated its comments as appropriate. GAO's ongoing work indicates that two areas accounted for the Department of Veterans Affairs' (VA) fiscal year 2015 projected funding gap of $2.75 billion. Specifically, Higher-than-expected obligations for VA's longstanding care in the community (CIC) program--which allows veterans to obtain care from providers outside of VA facilities--accounted for $2.34 billion or 85 percent of VA's projected funding gap. VA officials expected that the new Veterans Choice Program--which was implemented in fiscal year 2015 and also allows veterans to access care from non-VA providers under certain conditions--would absorb veterans' increased demand for care after public disclosure of long wait times. However, administrative weaknesses slowed enrollment into this new program. The unexpected increase in CIC obligations also exposed VA's weaknesses in estimating costs for CIC services and tracking associated obligations. VA officials did not determine that VA faced a projected funding gap until April 2015--6 months into the fiscal year, after they compared estimated authorizations with estimated obligations for CIC. Unanticipated obligations for hepatitis C drugs accounted for the remaining portion--$408 million--of VA's projected funding gap. VA did not anticipate in its budget the obligations for these costly, new drugs, which can help cure the disease, because the drugs did not gain approval from the Food and Drug Administration until fiscal year 2014--after VA had already developed its budget estimate for fiscal year 2015. VA officials told GAO that in fiscal year 2015 about 30,000 veterans received these drugs, which cost between $25,000 and $124,000 per treatment regimen. GAO's ongoing work indicates that VA has taken steps to better track obligations and project future healthcare utilization, but systems deficiencies and budgetary uncertainties remain. Specifically, GAO's preliminary results indicate that VA has taken the following steps: VA issued a standard operating procedure to help VA medical centers (VAMC) more accurately estimate the costs associated with authorizations for CIC. VA directed VAMCs to compare their estimated costs for CIC authorizations with estimated obligations for CIC on a monthly basis. VA allocated funds to each VAMC for CIC and hepatitis C drugs and began tracking VAMCs' obligations with monthly reports. Officials told GAO that once a VAMC has obligated its funds, it would have to request additional funds. VA would determine whether additional funds may be made available. These processes are necessary because continued deficiencies in VA's financial systems present challenges in tracking of obligations. VA updated the model it uses to inform most of its budget estimates for medical services. It now includes more recent data that reflect increased healthcare utilization among veterans in fiscal year 2015. However, VA officials noted uncertainties remain about the forecasted utilization of the Veterans Choice Program and emerging health care treatments, which could affect the accuracy of the health care budget estimates.

Congress has incrementally expanded the use and scope of "other transaction" authority since first authorizing its use more than a decade ago. In 1989, Congress gave DOD, acting through the Defense Advanced Research Projects Agency (DARPA), authority to temporarily use "other transactions" for basic, applied, and advanced research projects. In 1991, Congress made this authority permanent and extended it to the military services. In 1993, Congress enacted Section 845 of the National Defense Authorization Act for Fiscal Year 1994, which provided DARPA with authority to use, for a 3-year period, "other transactions" to carry out prototype projects directly relevant to weapons or weapon systems proposed to be acquired or developed by DOD. The National Defense Authorization Act for Fiscal Year 1997 temporarily extended DARPA's Section 845 authority and provided similar authority to the military services and defense agencies. Congress subsequently extended this authority's expiration date until September 30, 2004. In an era of a shrinking defense industrial base and new threats, DOD views "other transaction" prototype authority as a key to attracting nontraditional defense contractors. Section 803 of the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 defined a nontraditional defense contractor as an entity that has not, for at least a period of one year prior to the date of entering into or performing an "other transaction," entered into or performed (1) any contract subject to full coverage under the cost accounting standards or (2) any other contract in excess of $500,000 to carry out prototype projects or to perform basic, applied, or advanced research projects for federal agencies. DOD also views Section 845 authority as a way to test creative procurement strategies--such as the use of teaming and consortia--with traditional defense contractors and in industry areas not normally associated with government contracts. Under this authority, new business relationships, which could involve changes in traditional business processes or intellectual property rights agreements, are created to leverage commercial investments and to permit DOD to influence the design, development, and availability of commercial technologies to address national security needs. In fiscal year 2001, the most recent year for which complete data are available, DOD awarded 61 Section 845 agreements, totaling $392 million in federal government funds. Contractors contributed another $97 million in cost-sharing funds. Figure 1 shows these agreements by awarding organization. DOD is required to submit an annual report to Congress addressing both research and prototype "other transaction" agreements awarded in the preceding fiscal year. The report, which is prepared and signed by the Director, Defense Research and Engineering, includes input from the Director of Defense Procurement on Section 845 agreements. The report is to address (1) the technology areas in which the work was focused; (2) the extent of cost sharing among federal and nonfederal sources; and (3) how "other transactions" contributed to a broadening of the technology and industrial base and fostered new relationships and practices that support U.S. national security interests. In December 2000, the Under Secretary of Defense for Acquisition and Technology issued a revised guide that sets out the conditions and framework for using Section 845 agreements. The guide is effective for all solicitations issued after January 5, 2001, and provides a useful framework for tailoring the terms and conditions appropriate for each agreement. DOD agreements officers view the new guide as a significant improvement over the prior version. Several key improvements are as follows: The previous guide contained very limited information on the terms and conditions to be tailored when crafting a Section 845 agreement. The current guide provides additional details on the appropriate use of terms and conditions such as intellectual property, accounting systems, and cost sharing. It instructs agreements officers not to view previously issued agreements as a template or model, but to rely on their skill and experience and to consider Federal Acquisition Regulation clauses and commercial business practices, as well as prior "other transactions," when formulating agreements. The current guide also requires an acquisition strategy that identifies and discusses the rationale for using a Section 845 agreement. The previous guide did not define "nontraditional" contractors. The current guide defines the term, based in part on the definition in Section 803 of the National Defense Authorization Act for Fiscal Year 2001. It also requires that information on these entities be collected. DOD considers nontraditional defense contractors to be "business units," which can be any segment of an organization or an entire business organization that is not divided into segments. The previous guide listed eight examples of benefits to be considered under Section 845 agreements, including attracting business entities that normally do not do business with the government. However, it did not identify a specific metric that should be used on all Section 845 agreements. The current guide clearly states that DOD will track, as a metric, the participation of nontraditional defense contractors. DOD also included a draft audit policy in the revised guide. According to DOD officials, the impetus for including a draft audit policy came from two DOD Inspector General reports. The first, a 1997 report, questioned the adequacy of audit coverage on DARPA's "other transactions" for research. Although "other transactions" agreements for research included an audit clause, the report noted that agency officials intended to require audits only if they suspected fraud. The Inspector General argued that without final cost audits, agency officials could not ensure compliance with the statutory requirement pertaining to cost-sharing provisions. In a 1999 follow-up study on cost-sharing, the Inspector General raised similar concerns about prototype projects and included recommendations regarding audit policy for "other transactions" for prototype projects. On August 27, 2002, DOD issued a final rule codifying the definition of a nontraditional defense contractor and setting forth the conditions for using Section 845 agreements consistent with Section 803 of the National Defense Authorization Act for Fiscal Year 2001. The notice accompanying the final rule stated that the audit policy is being discussed and will be addressed by a separate rule. After exploring a number of performance indicators for Section 845 agreements, DOD selected one quantitative performance metric--the extent of nontraditional contractor participation--which is tracked by the Office of Defense Procurement. Officials believe that this metric is key because involving firms that do not traditionally do business with DOD increases DOD's opportunity to leverage commercial technology investments and to take advantage of commercial business processes, such as using an integrated team approach rather than a traditional prime- subcontractor structure. Congress also has encouraged the participation of commercial firms in the development of defense systems and has recognized the critical contributions of nontraditional participants in areas such as biotechnology and pharmaceuticals in today's national security environment. DOD contracted with RAND, a nonprofit institution, for a study to assess the overall effectiveness of the Section 845 acquisition approach and to explore the possibility of using additional metrics. In addition to this effort, a DOD working group, composed of officials from across DOD, considered the types of metrics that could be used to assess the effectiveness of Section 845 agreements. These two efforts identified several difficulties, as follows: Traditional metrics--such as cost growth, schedule slips, and performance shortfalls--are inappropriate for Section 845 projects that are inherently risky. A "path not taken" cannot be measured; that is, when a Section 845 agreement is used rather than a procurement contract, a statistical comparison between the two acquisition approaches cannot be made. Too many variables and too few Section 845 agreements would limit the results of a quantitative analysis. Few Section 845 projects have been completed, limiting the results to date. RAND concluded that important new technological capabilities--a desirable benefit of "other transaction" agreements--mostly come from segments of major firms that formerly focused on commercial projects but are now willing to apply their skills to the development of military prototypes. RAND also pointed out that there are other benefits associated with the flexibility inherent in this authority. For example, the flexibility to change project plans based on mutual agreement between DOD and industry managers, with minimal documentation or administrative burden, provides more powerful opportunities to cope with the problems and opportunities that occur when developing new systems and components. However, RAND emphasized the difficulties in developing quantifiable metrics that would be accepted as credible. In its effort to focus on collecting information on nontraditional contractors, DOD uses the Report of Other Transactions for Prototype Projects (DD Form 2759), which is completed by the agreements officer. (App. II contains a sample form.) According to the DOD guide, when funding actions are taken, the agreements officer must record information on whether the prime or subcontractor awardees are traditional contractors, nontraditional defense contractors, or non-profit organizations. The agreements officer also must record the names and addresses of significant nontraditional defense contractors. The summary information is sent to DOD's Office of Defense Procurement, where it is aggregated. According to the DD 2759 reports for Section 845 agreements awarded in fiscal year 2001, 16 nontraditional prime contractors and 29 significant nontraditional subcontractors participated in a total of 61 agreements. Nontraditional participants included commercial business units of U.S. traditional firms as well as foreign corporations. Congress requires DOD to report annually on all "other transaction" projects--for research as well as prototypes--awarded in the preceding fiscal year. While the Section 845 portion of the report addresses the issues set forth in the congressional reporting requirement, it does not present the number of nontraditional contractors in a clear, straightforward format, such as a summary table. Because information on nontraditional participants--DOD's key performance metric--is not summarized, it is difficult for Congress to assess how successful DOD has been in achieving this metric. The annual report includes a 1- or 2-page summary of each project that discusses (1) government and contractor cost contributions, (2) the reason for using the Section 845 authority, and (3) how the agreement contributed to a broadening of the technology base or fostered relationships and practices that support U.S. national security interests. In the fiscal year 2001 report, these individual summaries totaled 152 pages. In a fiscal year 2000 supplemental report to Congress, DOD did present a narrative summary of the number of nontraditional contractors; however, this was the only occasion when the information was clearly imparted. DOD officials stated that they are reluctant to add another reporting element and that the current report format meets congressional requirements. They added that they view the number of nontraditional contractors as secondary to the agreement-level information presented in the report. DOD also is not regularly reporting on or assessing the benefits derived from completed Section 845 agreements. In 1996, the Under Secretary of Defense for Acquisition and Technology requested a comparison of the benefits and drawbacks of completed agreements with the expected benefits at the time of award. However, this attempt to compile "lessons learned" was abandoned because many DOD officials believed that the results were parochial and not useful across the department. A draft version of the current Section 845 guide included a requirement for an assessment of completed agreements, but the requirement was not incorporated in the final version because DOD officials believe that another reporting requirement was not likely to produce a meaningful assessment of Section 845 results. DOD officials commented that the law only requires them to report on projects awarded in the previous fiscal year. They acknowledged, however, that periodic assessments of the benefits derived from completed agreements could be useful. By updating the Section 845 guide and requiring the number of nontraditional contractors to be measured as a performance metric, DOD has implemented our April 2000 recommendations. However, the reporting on the benefits derived from this alternative acquisition approach could be improved. A summary table in the annual report to Congress, setting forth the number of nontraditional contractors brought in under Section 845 agreements during the preceding year, would provide a clear picture of the extent to which DOD's performance metric is being achieved. The current report format, consisting of summaries of each agreement, requires the reader to review each summary sheet in order to determine how the Section 845 authority was used--including the number of nontraditional contractors participating in the agreement. Thus, its usefulness to Congress is limited. Further, in the absence of regular assessments of the benefits derived from completed projects, DOD and the Congress lack vital information on the results the government is deriving from this flexible procurement strategy. The experience that DOD has gained from the use of Section 845 authority can be useful to Congress as it makes decisions about subsequent extensions of this authority to DOD and in future congressional deliberations. We recommend that the Secretary of Defense incorporate in the annual report to Congress summary information on the extent of nontraditional contractor participation and periodically report to Congress the results of studies on the benefits derived from completed Section 845 projects, including how key private sector participants contributed to the results. In written comments on a draft of this report, DOD agreed to incorporate in the summary of the annual report to Congress information on the number of new agreements and to break out the reasons for using the authority. However, DOD did not agree with our recommendation to include the number of nontraditional contractors in the annual report, stating that a raw count does not necessarily indicate the extent of nontraditional contractor participation and that it is secondary information derived from a separate reporting system. We agree that a raw number alone can be misleading. However, we do not understand why DOD is reluctant to publish the total number of nontraditional contractors--along with the other information to be reported--when those numbers are being internally collected and when this is the key performance metric DOD has established. Including the number of nontraditional contractors, along with the other information DOD has agreed to provide, would give Congress a more complete basis on which to assess the achievements gained through the use of Section 845 authority. DOD concurred with our second recommendation but stated that it would oppose the establishment of a regular reporting requirement. We are not advocating a new reporting requirement; however, we believe that periodic assessments of completed Section 845 projects would provide Congress useful information on the benefits the department is deriving from use of this authority. To assess the comprehensiveness of DOD's new Section 845 guide, we compared it to the November 1998 guide that was in effect during our prior review. To determine the adequacy and usefulness of the revised guide and the performance metrics used, we interviewed officials in the Office of Defense Procurement and in the Office of Acquisition Initiatives--Office of the Under Secretary of Defense for Acquisition, Technology and Logistics; Washington Headquarters Services' Directorate for Information Operations and Reports; the headquarters offices of the Army, Navy, and Air Force; DARPA; and NIMA. We also reviewed reports prepared by DOD's Office of the Inspector General, RAND, and GAO. In addition, we reviewed various directives, memorandums, publications, correspondence, and legislation concerning Section 845 authority. To determine the number and value of fiscal year 2001 Section 845 agreements and the number of agreements having nontraditional defense contractors, we analyzed data compiled by the Office of Defense Procurement. In addition, at each military service and DARPA, we reviewed the Reports of Other Transactions for Prototype Projects (DD Form 2759) for all agreements awarded in fiscal year 2001. We did not validate or verify the information reported on these forms, including whether the cited nontraditional defense contractors met the definition in Section 803 of the National Defense Authorization Act for Fiscal Year 2001. To determine whether Congress is receiving adequate information on the number of nontraditional defense contractors participating in Section 845 agreements and whether DOD is assessing the benefits derived from completed projects, we reviewed the Section 845 portion of the annual reports for fiscal years 1999 through 2001 and the supplemental reports provided to Congress in fiscal years 1999 and 2000. We also reviewed DOD's guidance and memorandums and held discussions with officials from the Office of Defense Procurement. We conducted our review between April and August 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Director, DARPA; the Director, NIMA; and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 or Michele Mackin at (202) 512-4309 if you have any questions regarding this report. Other major contributors to this report were William M. McPhail, Rosa M. Johnson, and Kenneth E. Patton.

In April 2000, GAO reported on the Department of Defense's (DOD) use of Section 845 agreements, also referred to as "other transactions" for prototype projects. These are transactions other than contracts, grants, or cooperative agreements that generally are not subject to federal laws and regulations applicable to procurement contracts. In December 2000, DOD revised its Section 845 guide. The guide specifies when Section 845 agreements may be used and provides criteria for tailoring terms and conditions for each agreement. Officials from the military services and defense agencies have found the new guide useful and a significant improvement over the prior version. The Secretary of Defense has required a metric--the number of participating nontraditional defense contractors--which is measurable and directly related to each agreement. This metric is tracked and reported internally. DOD explored additional metrics, but concluded that the number of nontraditional contractors was the only one that was quantifiable and tied directly to Section 845 outcomes. DOD's annual report to Congress on Section 845 agreements consists of summaries on each agreement. However, the key metric--the number of nontraditional contractors--is not clearly presented in these reports, making it difficult to gauge DOD's progress in achieving success on this objective. Further, DOD is not regularly assessing reporting on the benefits derived from completed Section 845 projects. In the absence of such assessments, congressional and DOD decision makers lack a vital piece of information that would help them determine whether this flexible procurement authority is achieving expecting results.

As the nation's largest cash-assistance program for workers with disabilities, DI provides benefits to eligible individuals under Title II of the Social Security Act. An individual is eligible to receive DI benefits if he or she has a medically determinable physical or mental impairment that (1) has lasted (or is expected to last) at least 1 year or is expected to result in death and (2) prevents the individual from engaging in SGA. SGA is defined as work activity that involves significant physical or mental activities performed for pay or profit. For individuals whose impairment is anything other than blindness, earnings averaging over $1,000 a month for calendar year 2010 generally demonstrate SGA. For blind individuals, earnings averaging over $1,640 a month for the year 2010 generally demonstrate SGA for DI. The amount of earnings that generally demonstrates SGA can vary from year to year. For example, the SGA amount for individuals with disabilities, other than blindness, was $980 in 2009. Individuals with disabilities must also have a specified number of recent work credits under the Social Security program at the onset of medical impairment. An individual may qualify on the basis of the work record of a deceased spouse or the work record of a parent who is deceased, retired, or considered eligible for disability benefits, meaning one disability beneficiary can generate multiple monthly disability payments. DI benefits are financed by payroll taxes paid into the Federal Disability Insurance Trust Fund by covered workers and their employers, on the basis of each worker's earnings history. Cash benefits are payable monthly, as long as the worker remains eligible for benefits, until the worker reaches full retirement age or dies. In fiscal year 2010, more than 10 million beneficiaries received DI benefits totaling $121.6 billion, and the program's average monthly benefit was about $922. As directed by federal law, SSA must reduce DI benefits for individuals receiving certain other government disability benefits, such as worker's compensation. However, SSA may not reduce DI benefits for individuals receiving UI or for individuals earning less than SGA. As mentioned, the Social Security Board of Trustees projects that the DI trust fund will be exhausted in 2016 and noted that changes designed to improve the financial status of the DI program are needed soon. Established by the Social Security Act of 1935, the federal-state UI program temporarily and partially replaces the lost earnings of those who become unemployed through no fault of their own. To be eligible for UI benefits, unemployed workers must meet eligibility requirements established by state laws that conform to federal law, including that they have worked recently, be involuntarily unemployed, and be able and available for work. Whereas federal statutes and regulations provide broad guidelines on UI eligibility, the specifics of UI eligibility are determined by each state. According to DOL, all states require that a claimant must have earned a specified amount of wages, worked a certain number of weeks in covered employment, or must have met some combination of the wage and employment requirements within his/her base period. To be eligible for benefits, claimants must also be free from disqualification for acts such as voluntary leaving without good cause, discharge for misconduct connected with the work, and refusal of suitable work. In addition to these eligibility requirements, all states require that a claimant must be able and available for work. However, "able and available for work" requirements vary among the states, according to DOL. For example, a few states specify that a worker must be physically able, or mentally and physically able, to work. Likewise, while some states require that a worker must be available for work, other states require that a worker must be available for suitable work; still other states require that a worker be available for work in the worker's usual occupation or for work in which the worker is reasonably fitted by training and experience. According to DOL, in addition to being able and available for work, all states require by law or by practice that a worker be actively seeking work or making a reasonable effort to obtain work. Finally, some state laws expressly prohibit denying UI eligibility on the basis of illness or disability under certain circumstances. UI benefits and administrative costs are financed primarily by taxes levied on employers. These taxes are deposited in the appropriate accounts within the Unemployment Trust Fund, which consists of 53 state accounts and other federal accounts dedicated to special purposes. The severity and length of the recent recession, and the slow pace of recovery, have placed a heavy demand on state UI trust funds, resulting in very large numbers of workers receiving benefits for very long periods of time. Since mid-2008, Congress and the states have temporarily extended the period of time that displaced workers can receive UI benefits to up to 99 weeks, though the maximum number of weeks of available benefits varies among the states. In April 2010, GAO reported that state UI trust funds were at historically weak levels, with most requiring federal loans to pay benefits. During fiscal year 2010, state agencies paid 11.3 million beneficiaries $156.4 billion in federal and state unemployment benefits. UI benefits vary substantially during a business cycle. As shown in figure 1, UI benefits varied substantially from 2005 to 2011, while DI benefits steadily increased during those years. In fiscal year 2010, 117,000 individuals received concurrent cash benefit payments of more than $850 million. As shown in figure 2, these individuals represented less than 1 percent of the total beneficiaries of both programs. However, estimated overlapping cash benefits paid to these individuals totaled over $281 million from the DI program and more than $575 million from the UI program. For individuals receiving overlapping benefits in fiscal year 2010, we estimate the average quarterly amount of overlapping cash benefit payments to be $1,093 in DI and $2,231 in UI, for a quarterly average of $3,324 in overlapping benefits. Differences in program rules and definitions allow individuals in certain circumstances to receive overlapping DI and UI benefits without violating eligibility requirements. As mentioned, SSA's definition of a disability involves work that does not rise to the level of SGA. For 2010, a non-blind person who is earning more than a $1,000 a month is ordinarily considered to be engaging in SGA. In contrast, states' determination of "able and available for work" criteria for UI benefits may include performing work that does not rise to the level of SGA. As a result, some individuals may have a disability under federal law but still be able and available for work under state law, thus eligible to receive DI and UI concurrently. SSA officials stated that UI is considered unearned income and therefore does not affect DI benefits. DOL officials acknowledged that certain individuals may be eligible for both DI and UI, depending on the applicable state laws regarding UI eligibility. Because these overlapping payments may be allowed under both programs' eligibility requirements, and no federal law authorizes an automatic reduction or elimination of benefits if a recipient receives both payments, neither SSA nor DOL have any processes to identify these overlapping payments. As such, the costs associated with establishing mechanisms to reduce or eliminate these overlapping payments are not readily available. While the DI and UI programs generally serve separate populations and provide separate services--thus not meeting our definition for overlapping programs--the concurrent cash benefit payments made to individuals eligible for both programs are an overlapping service for the replacement of their lost earnings. We define overlaps as programs that have similar goals, devise similar strategies and activities to achieve those goals, or target similar users. Our prior work on overlapping government programs has found that, in some instances, overlapping programs or activities have led to inefficiencies, and we have determined that greater efficiencies or effectiveness might be achievable. However, in other instances, it may be appropriate for multiple agencies or entities to be involved in the same programmatic or policy area due to the nature or magnitude of the federal effort. Although current program rules allow overlapping benefits under certain circumstances, concurrent receipt of DI and UI benefits can also be an indicator of improper payments. For example, some individuals who have a disability as determined by SSA may be receiving improper UI payments because they are not "able and available" for work. Similarly, some individuals receiving UI benefits may be receiving improper DI payments because they no longer have a disability as defined by SSA. Specifically, being "able and available" for work may indicate that an individual's medical condition no longer prevents him or her from performing work that rises to the level of SGA. As mentioned, neither SSA nor DOL have any processes to identify overlapping DI and UI payments. As a result, neither SSA nor DOL currently evaluates whether overlapping payments made to these individuals may be proper or improper. For our review, we obtained DI and UI information for these eight individuals beyond fiscal year 2010. Of the eight individuals we selected for further investigation, SSA determined that one individual had a DI benefit overpayment. Additionally, three individuals had UI benefit overpayments, as determined by the appropriate state UI office. Because we selected a small number of individuals for our review, the results cannot be projected to the population of individuals receiving overlapping DI and UI benefits. earnings may be related to work that makes this individual ineligible for UI benefits. The Massachusetts UI benefits were exhausted after 99 weeks as of June, 2011. As of April, 2012, the individual remains in current pay status in the DI program, with a monthly DI benefit amount of $2,377. Six of the individuals we selected for further investigation received overlapping DI and UI benefits for 18 months or more. For example, one individual began receiving DI benefits in 2004 originally due to disorders of the back, and received overlapping DI and UI payments, which totaled over $107,000, in 36 different months from 2008 to 2011. During that period, this individual worked for construction companies and received UI benefit payments from New Mexico in 2008, Wisconsin in 2009, Kansas in 2010, and Montana in 2011. Montana officials stated that they also received wage data from North Dakota for use in adjudicating the UI claim in their state. As of April, 2012, this individual was no longer receiving UI benefits from these states, but continued to receive cash benefits from the DI program. SSA officials told us that this individual is currently under a continuing disability review to determine if the beneficiary is ineligible for DI due to work at or above the SGA level. DI and UI provide important safety nets for American workers who have lost their income. However, both trust funds face serious fiscal sustainability challenges, prompting the need to examine opportunities for potential cost savings. While the programs target different populations and generally provide separate services, existing rules and definitions result in a limited number of individuals being eligible for overlapping DI and UI payments. However, the concurrent receipt of these benefits can also provide an indicator of improper payments related to DI or UI. Because these overlapping payments may be allowed under both programs' eligibility requirements, and no federal law authorizes an automatic reduction or elimination of benefits if a recipient receives both payments, neither SSA nor Labor has a process to identify these overlapping benefit payments. As a result, for individuals receiving both DI and UI benefits, the government is replacing a portion of their lost earnings not once, but twice. Reducing or eliminating this overlap and potential improper payments could offer substantial savings, though actual savings are difficult to estimate because the potential costs of establishing mechanisms to do so are not readily available. We recommend that the Secretary of Labor work with the Commissioner of SSA to (1) evaluate the circumstances under which individuals are receiving overlapping DI and UI payments, taking appropriate action, as necessary, for any payments determined to be improper, and (2) assess whether cost savings or other benefits might be achieved by reducing or eliminating overlapping DI and UI cash benefit payments being made within the existing laws and regulations, seeking congressional authority to do so as appropriate. We provided a draft of this report to SSA and DOL for comment. DOL and SSA provided written comments to the draft which can be found in appendices I and II. DOL and SSA agreed with our recommendation that DOL work with SSA to evaluate overlapping DI and UI benefits, taking appropriate action for any payments determined to be improper, and assessing whether cost savings or other benefits might be achieved by reducing or eliminating overlapping DI and UI cash benefit payments. DOL and SSA also both recognized that the states play an important role in the UI program, and DOL recommended that we encourage states to participate in addressing the report's recommendations. In this regard, we agree that states' programmatic knowledge would significantly contribute to the evaluation of overlapping DI and UI benefits and encourage state participation as appropriate. We also believe that it will be important for DOL to reach out to the states in carrying out our recommendations to evaluate these overlapping benefits. DOL and SSA also provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Commissioner of the Social Security Administration, the Secretary of Labor, 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 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.

The DI and UI trust funds face serious fiscal sustainability challenges. In addition to other services, both programs provide cash benefits to their targeted populations to replace lost earnings. DI is available to workers who are unable to engage in SGA because of physical or mental impairments expected to last at least 12 months or result in death. SGA is defined as work activity that involves significant physical or mental activities performed for pay or profit. UI provides temporary cash benefits to eligible workers who are able to work but remain involuntarily unemployed. GAO was asked to determine the extent to which individuals received DI and UI benefits concurrently. To do so, GAO matched unemployment files with SSA disability files for fiscal year 2010. GAO also reviewed DI and UI case files for a nongeneralizable selection of 8 individuals - 4 from the top 50 recipients of concurrent DI and UI benefits in fiscal year 2010, and 4 who received UI benefits based on wages from multiple states. These examples cannot be generalized beyond those presented. In fiscal year 2010, 117,000 individuals received concurrent cash benefit payments from the Disability Insurance (DI) and Unemployment Insurance (UI) programs of more than $850 million, which is allowable in certain circumstances under current program authority. While these individuals represented less than 1 percent of the total beneficiaries of both programs, the cash benefits they received totaled over $281 million from DI and more than $575 million from UI. One individual GAO selected for further investigation received over $62,000 in overlapping benefits in a year. Based on GAO inquiries, state UI officials are reviewing the person's UI eligibility because of earnings that may be related to work that makes the person ineligible for UI benefits. Under certain circumstances, individuals may be eligible for concurrent cash benefit payments due to differences in DI and UI eligibility requirements. Specifically, the Social Security Administration's (SSA) definition of a disability involves work that does not rise to the level of substantial gainful activity (SGA). In 2010, a monthly income of $1,000 or more for a non-blind beneficiary generally demonstrated SGA. In contrast, the Department of Labor allows states' determination of "able and available for work" eligibility criteria for UI benefits to include work that does not rise to the level of SGA. Therefore, some individuals may have a disability under federal law but still be eligible for UI under state law because they are able and available for work that does not rise to the level of SGA. Although DI and UI generally provide separate services to separate populations--and thus are not overlapping programs--the concurrent cash benefit payments for individuals eligible for both programs are an overlapping benefit when both replace lost earnings. While SSA must reduce DI benefits for individuals receiving certain other government disability benefits, such as worker's compensation, no federal law authorizes an automatic reduction or elimination of overlapping DI and UI benefits. As a result, neither SSA nor DOL has any processes to identify these overlapping payments. Reducing or eliminating overlapping or improper payments could offer substantial savings, though actual savings are difficult to estimate because the potential costs of establishing mechanisms to do so are not readily available. DOL should work with SSA to (1) evaluate overlapping DI and UI cash benefit payments, taking appropriate action for any improper payments, and (2) assess whether cost savings or other benefits might be achieved by reducing or eliminating overlapping DI and UI cash benefit payments being made within the existing laws and regulations, seeking congressional authority to do so as appropriate. DOL and SSA agreed with the recommendations.

As we reported in October 2009, insufficient site-specific data, such as local projections of expected changes, make it hard for federal, state, and local officials to predict the impacts of climate change, and thus hard for these officials to justify the current costs of adaptation efforts for potentially less certain future benefits. Based on the responses by a diverse array of federal, state, and local officials knowledgeable about adaptation to a web-based questionnaire designed for that report, related challenges generally fit into two main categories: (1) translating climate data--such as projected temperature and precipitation changes--into information that officials need to make decisions and (2) difficulty in justifying the current costs of adaptation with limited information about future benefits. The process of providing useful information to officials making decisions about adaptation can be summarized by the following: First, data from global-scale models must be "downscaled" to provide climate information at a geographic scale relevant to decision makers. About 74 percent (133 of 179) of the officials who responded to our questionnaire rated "availability of climate information at relevant scale (i.e., downscaled regional and local information)" as very or extremely challenging. Second, the downscaled climate information must be translated into impacts at the local level, such as increased stream flow. Some respondents and officials interviewed for our October 2009 report said that it is challenging to link predicted temperature and precipitation changes to specific impacts. For example, one federal official said that "we often lack fundamental information on how ecological systems/species respond to non-climate change related anthropogenic stresses, let alone how they will respond to climate change." Third, local impacts must be translated into costs and benefits, since this information is required for many decision making processes. Almost 70 percent (126 of 180) of the respondents to our questionnaire rated "understanding the costs and benefits of adaptation efforts" as very or extremely challenging. As noted by one local government respondent, it is important to understand the costs and benefits of adaptation efforts so they can be evaluated relative to other priorities. Fourth, decision makers need baseline monitoring data to evaluate adaptation actions over time. Nearly 62 percent (113 of 181) of the respondents to our questionnaire rated the "lack of baseline monitoring data to enable evaluation of adaptation actions (i.e., inability to detect change)" as very or extremely challenging. These challenges make it difficult for officials to justify the current costs of adaptation efforts for potentially less certain future benefits. A 2009 report by the National Research Council (NRC) discusses how officials are struggling to make decisions based on future climate scenarios instead of past climate conditions. According to the report, requested by the Environmental Protection Agency and NOAA, usual practices and decision rules (e.g. for building bridges, implementing zoning rules, using private motor vehicles) assume a stationary climate--a continuation of past climate conditions, including similar patterns of variation and the same probabilities of extreme events. According to the NRC report, that assumption, which is fundamental to the ways people and organizations make their choices, is no longer valid. Federal actions to provide and interpret site-specific information would help address challenges associated with adaptation efforts, based on our analysis of responses to the web-based questionnaire and other materials analyzed for our October 2009 report. The report discussed several potential federal actions that federal, state, and local officials identified as useful to inform adaptation decision making. These included state and local climate change impact and vulnerability assessments and the development of processes and tools to access, interpret, and apply climate information. In that report, we also obtained information regarding the creation of a climate service--a federal service to consolidate and deliver climate information to decision makers to inform adaptation efforts. About 61 percent (107 of 176) of the federal, state, and local officials who responded to the web-based questionnaire developed for our October 2009 adaptation report rated the "creation of a federal service to consolidate and deliver climate information to decision makers to inform adaptation efforts" as very or extremely useful. Respondents offered a range of potential strengths and weaknesses for such a service. Several said that a climate service would help consolidate information and provide a single-information resource for local officials, and others said that it would be an improvement over the current ad hoc system. A climate service would avoid duplication and establish an agreed set of climate information with uniform methodologies, benchmarks, and metrics for decision making, according to some officials. According to one federal official, consolidating scientific, modeling, and analytical expertise and capacity could increase efficiency. Similarly, some officials noted that with such consolidation of information, individual agencies, states, and local governments would not have to spend money obtaining climate data for their adaptation efforts. Others said that it would be advantageous to work from one source of information instead of different sources of varying quality. Some officials said that a climate service would demonstrate a federal commitment to adaptation and provide a credible voice and guidance to decision makers. In an announcement on February 8, 2010, the Department of Commerce proposed establishing a NOAA climate service. Though not yet established, information is available on the NOAA climate service website, including draft vision and strategic framework documents. According to NOAA documents, such a climate service would provide a single, reliable, and authoritative source for climate data, information, and decision support services to help individuals, businesses, communities, and governments make smart choices in anticipation of a climate changed future. A September 2010 report by the National Academy of Public Administration discusses the factors needed for a NOAA climate service to succeed--such as the designation of a lead federal agency to be the day-to-day integrator of the overall federal effort regarding climate science and services--and makes recommendations on how to achieve those factors. Other respondents to our questionnaire, however, were less enthusiastic about the creation of a climate service. Some voiced skepticism about whether it was feasible to consolidate climate information, and others said that such a system would be too rigid and may get bogged down in lengthy review processes. Furthermore, certain officials stated that building such capacity may not be the most effective place to focus federal efforts because the information needs of decision makers vary so much by jurisdiction. Several officials noted that climate change is an issue that requires a multidisciplinary response, and a single federal service may not be able to supply all of the necessary expertise. For example, one federal official stated that the information needs of Bureau of Reclamation water managers are quite different from the needs of Bureau of Land Management rangeland managers, which are different from the needs of all other resource management agencies and programs. The official stated that it seems highly unlikely that a single federal service could effectively identify and address the diverse needs of multiple agencies. Several respondents also said that having one preeminent source for climate change information and modeling could stifle contrary ideas and alternative viewpoints. Moreover, several officials who responded to our questionnaire were concerned that a climate service could divert attention and resources from current adaptation efforts by reinventing duplicative processes without making use of existing structures. The 2009 NRC report on informing decisions in a changing climate recommends that the federal government's adaptation efforts should be undertaken through a new integrated interagency initiative with both service and research elements but that such an initiative should not be centralized in a single agency. Doing so, according to this report, would disrupt existing relationships between agencies and their constituencies and formalize a separation between the emerging science of climate response and fundamental research on climate and the associated biological, social, and economic phenomena. Furthermore, the report states that a climate service located in a single agency and modeled on the weather service would by itself be less than fully effective for meeting the national needs for climate-related decision support. The NRC report also notes that such a climate service would not be user-driven and so would likely fall short in providing needed information, identifying and meeting critical decision support research needs, and adapting adequately to changing information needs. We have not made recommendations regarding the creation of a climate service within NOAA or any other agency or interagency body, although the provision of climate data and services will be an important consideration in future governmentwide strategic planning efforts, particularly in an era of declining budgets. Federal strategic planning efforts could be improved for many aspects of the climate change enterprise. Our October 2009 report on climate change adaptation concluded that, to be effective, related federal efforts must be coordinated and directed toward a common goal. This report recommended the development of a strategic plan to guide the nation's efforts to adapt to a changing climate, including the identification of mechanisms to increase the capacity of federal, state, and local agencies to incorporate information about current and potential climate change impacts into government decision making. Some actions have subsequently been taken to improve federal adaptation efforts, but our May 2011 report on climate change funding found that federal officials do not have a shared understanding of strategic governmentwide priorities. This report recommended, among other things, the clear establishment of federal strategic climate change priorities, including the roles and responsibilities of the key federal entities, taking into consideration the full range of activities within the federal climate change enterprise. In other reports, we also noted the need for improved coordination of climate- related activities. For example, our April 2010 report on environmental satellites concluded that gaps in satellite coverage, which could occur as soon as 2015, are expected to affect the continuity of important climate and space weather measurements. In that report, we stated that, despite repeated calls for interagency strategies for the long-term provision of environmental data from satellites (both for climate and space weather purposes), our nation still lacks such plans. Of particular importance in adaptation are planning decisions involving physical infrastructure projects, which require large capital investments and which, by virtue of their anticipated lifespan, will have to be resilient to changes in climate for many decades. The long lead time and long life of large infrastructure investments require such decisions to be made well before climate change effects are discernable. Our ongoing work for the Senate Committee on Environment and Public Works Subcommittee on Oversight and Subcommittee on Transportation and Infrastructure will explore this issue by reviewing the extent to which federal, state, and local authorities consider the potential effects of climate change when making infrastructure investment decisions. Chairman Begich, Ranking Member Snowe, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittee may have. For further information about this testimony, please contact David Trimble at (202) 512-3841 or [email protected]. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. Barb Patterson, Anne Hobson, Richard Johnson, Ben Shouse, Jeanette Soares, Kiki Theodoropoulos, and Joseph Dean "Joey" Thompson 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.

Climate change is a complex, crosscutting issue that poses risks to many existing environmental and economic systems, including agriculture, infrastructure, ecosystems, and human health. A 2009 assessment by the United States Global Change Research Program (USGCRP) found that climate-related changes--such as rising temperature and sea level--will combine with pollution, population growth, urbanization, and other social, economic, and environmental stresses to create larger impacts than from any of these factors alone. According to the National Academies, USGCRP, and others, greenhouse gases already in the atmosphere will continue altering the climate system into the future, regardless of emissions control efforts. Therefore, adaptation--defined as adjustments to natural or human systems in response to actual or expected climate change--is an important part of the response to climate change. This testimony addresses (1) the data challenges that federal, state, and local officials face in their efforts to adapt to a changing climate, (2) the actions federal agencies could take to help address these challenges, and (3) federal climate change strategic planning efforts. The information in this testimony is based on prior work, largely on GAO's recent reports on climate change adaptation (GAO-10-113) and federal climate change funding (GAO-11-317). These reports are based on, among other things, analysis of studies, site visits to areas pursuing adaptation efforts, and responses to a web-based questionnaire sent to federal, state, and local officials. As GAO reported in October 2009, challenges from insufficient site-specific data--such as local projections--make it hard for federal, state, and local officials to predict the impacts of climate change, and thus hard to justify the current costs of adaptation efforts for potentially less certain future benefits. Based on responses from a diverse array of federal, state, and local officials knowledgeable about adaptation, related challenges generally fit into two main categories: (1) translating climate data--such as projected temperature and precipitation changes--into information that officials need to make decisions and (2) the difficulty in justifying the current costs of adaptation with limited information about future benefits. Federal actions to provide and interpret site-specific information would help address data challenges associated with adaptation efforts, based on responses to GAO's web-based questionnaire sent to federal, state, and local officials and other materials analyzed for its October 2009 report. In addition to several potential federal actions identified as useful by respondents to GAO's questionnaire, including the development of state and local climate change vulnerability assessments, GAO's 2009 report also contained information about the creation of a federal climate service. Specifically, about 61 percent (107 of 176) of respondents rated the "creation of a federal service to consolidate and deliver climate information to decision makers to inform adaptation efforts" as very or extremely useful. Respondents offered a range of potential strengths and weaknesses for such a service. For example, several respondents stated that a climate service would help consolidate information and provide a single information resource for local officials. However, some respondents to GAO's questionnaire voiced skepticism about whether it was feasible to consolidate climate information, and others stated that such a service would be too rigid and may get bogged down in lengthy review processes. GAO has not made recommendations regarding the creation of a climate service within the National Oceanic and Atmospheric Administration or any other agency or interagency body. Federal strategic planning efforts could be improved for many aspects of the climate change enterprise. For example, GAO's October 2009 report on climate change adaptation concluded that, to be effective, related federal efforts must be coordinated and directed toward a common goal. This report recommended the development of a strategic plan to guide the nation's efforts to adapt to a changing climate, including the identification of mechanisms to increase the capacity of federal, state, and local agencies to incorporate information about current and potential climate change impacts into government decision making. Some actions have subsequently been taken to improve federal adaptation efforts, but GAO's May 2011 report on climate change funding found that federal officials do not have a shared understanding of strategic governmentwide priorities.

GPRA is intended to shift the focus of government decision making, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies' major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the president's budget, provide a direct linkage between an agency's longer-term goals and mission and day-to-day activities. Annual performance reports are to subsequently report on the degree to which performance goals were met. The issuance of the agencies' performance reports, due by March 31, represents a new and potentially more substantive phase in the implementation of GPRA--the opportunity to assess federal agencies' actual performance for the prior fiscal year and to consider what steps are needed to improve performance, and reduce costs in the future. Treasury is responsible for a broad scope of activities that touch the lives of all Americans, including collecting taxes, managing the government's finances, securing U.S. borders, controlling firearms-related crime, and managing seized assets. This section discusses our analysis of Treasury's performance in achieving its selected key outcomes and the strategies the agency has in place, particularly human capital and information technology, for accomplishing these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the agency provided assurance that the performance information it is reporting is credible. On the basis of information in Treasury's 2000 performance report, we could not assess its progress in effectively and fairly administering the tax laws because the report lacked information on strategic measures directly related to this outcome. However, the results of our work and other reported information below the strategic level on the performance of Treasury's agency responsible for relevant programs--the Internal Revenue Service (IRS)--indicated that IRS improved its performance on one key indicator while losing ground on others. As was the case last year, neither Treasury nor IRS had any measures that were specifically linked to the outcome of effective and fair administration of tax laws. IRS is modernizing all aspects of the agency's operations, such as its organizational structure, business processes, technology, and performance management. As part of its modernization, IRS developed three agencywide strategic goals, which we used to assess this outcome. The goals are top quality service to each taxpayer in every interaction, top quality service to all taxpayers through fair and uniform application of the law, and productivity through a quality work environment. In fiscal year 2000, Treasury reported that the IRS made progress in conceptualizing and identifying the measures it needs for its goals.Currently the IRS has only an employee satisfaction measure, which relates to the third goal. While IRS-wide strategic measures to assess this outcome are not available, our work on measures dealing with collecting revenues, providing taxpayer service, and enforcing tax laws indicated mixed results. On the plus side, during fiscal year 2000, IRS issued refunds without significant problems and taxpayers had an easier time getting through to telephone assistors. On the down side, the quality of service for taxpayers who visited taxpayer assistance centers and trends in enforcement functions continue to be troubling. For example, Treasury's fiscal year 2000 performance report listed five IRS-wide measures that Treasury designated as key performance indicators related to the outcome. The agency did not meet its target for four of the five indicators including all three measures of quality. Treasury's explanations for not meeting its targets included reasons such as the decline "...was caused by a failure to meet any one, several, or all of the standards measured in this category, thus resulting in a lower overall composite score." Figure 1 shows IRS' performance over time on the five key indicators. In its fiscal year 2002 plan for IRS, Treasury lacked specific strategies to demonstrate how it would achieve its strategic goals and objectives and, thereby, be ensured of effectively and fairly administering the tax laws. Instead, IRS' plan included individual strategies for meeting each of the 73 measures in the plan. Of those measures, 18 are outcome-oriented and focused on quality, timeliness, customer satisfaction, or employee satisfaction. While 5 of these measures will establish baseline data, the strategies to implement the remaining 13 measures are, in general, continuations of those used in the previous year. For example, the strategy for improving field collection quality in fiscal year 2001 included using data analysis to target areas for improvement, planning training around identified needs, and delivering a redesigned, web-based manual. For fiscal year 2002, the strategy to improve quality in that area included continued data analysis and training and added a strategy to develop a system for embedding responsibilities for quality at the organizational level closest to customers. Treasury did not explain why it was likely to be more successful in fiscal year 2002 by continuing similar strategies for the five measures where the targets were not met. In February 2001, we again recommended that IRS more clearly link its measures to its goals and objectives. In response, the Commissioner of Internal Revenue stated that IRS would make such refinements as it gains more experience with modernization. We are unable to assess progress toward achieving less waste, fraud, and error relating to the Earned Income Tax Credit (EITC) because Treasury did not report on measures for any aspect of IRS' administration of the program, and IRS also lacked performance measures for the program. We first identified this program as a high-risk area in 1995 and, more recently, noted in our December 2000 report that the overall impact of the compliance initiative remained unclear despite its success in identifying hundreds of millions of dollars in erroneous EITC claims in fiscal year 2000. Yet, no performance measures specific to EITC activities are planned at the agency level. Although IRS already collects some data for an internal quarterly tracking report, Treasury does not plan to use that data to assess and report program performance. Treasury plans to continue emphasizing increased customer service for and compliance activities affecting both taxpayers and preparers in its current strategy for reducing problems in the EITC program. However, Treasury's performance plan for IRS does not include measures for those areas or others related to this outcome. The 5-year strategy for EITC, instituted in 1998, includes expanding customer service and taxpayer education, reviewing preparers' compliance, and improving return selection methods for audits, among others. However, the strategy does not address training needs, performance management initiatives, or measurement of the strategy's effectiveness. Without performance measures and an evaluation strategy, Treasury will not be able to assess progress. Limitations in the performance measures reported by Treasury make it difficult to gauge the progress of IRS in collecting tax debt and the Financial Management Service (FMS) in collecting non-tax debt. However, other available information showed continuing declines in most of IRS' collection actions to collect delinquent tax debt and roughly stable collections by FMS of non-tax debts. Also, Treasury's plans for the two agencies provided little information on how their strategies for improvement will increase debt collections. On the basis of information in Treasury's 2000 performance report, we could not assess Treasury's progress in improving its collection of delinquent taxes because none of the performance measures were linked to this outcome. However, based on other information about collection programs at the IRS--the Treasury agency responsible for the relevant programs--we are troubled by the performance with respect to this outcome. Treasury's performance report measures output for this effort in terms of volume of collection cases closed and timeliness of certain types of collection actions. Treasury did not report performance measures that would provide perspective on whether IRS is collecting the correct amount of taxes under proper collection procedures. For example, the performance report did not contain measures for amounts collected as a percentage of the total value of the collection cases that were closed, or at the IRS-wide level, a measure for enforcement revenue collected as a percent of unpaid taxes. Such measures, over time, would give a clearer indication than case closure data as to whether Treasury is making any headway in improving delinquent tax collections. As figure 2 illustrates, enforcement revenue collected has not kept pace with the growth in the levels of unpaid taxes. Furthermore, our recent work showed declines in important collection actions including seizures, liens, and levies. Although the Commissioner of Internal Revenue predicted last year that the downward trends for these actions would be reversed, by and large, they were not. In addition, the reliability and accuracy of these output measures in Treasury's performance report is questionable. Our audit of IRS' fiscal year 2000 financial statements found that IRS was unable to provide documentation that it had performed validation and verification procedures on its key performance indicators. Treasury's strategy in its fiscal year 2002 IRS plan for increasing collections of tax debts focused on reducing the diversion to noncompliance duties of staff who are experienced in compliance efforts and enhancing the efficiency of the delinquent tax account management. This included (1) adopting a risk-based approach for identifying better yielding accounts for collection and examination and (2) making more effective use of technology and specialization for processing unpaid tax transactions through IRS systems. However, although these strategies potentially could improve tax debt collections, the performance plans did not contain performance measures for assessing its progress. In addition, we previously reported that IRS does not have adequate records on its unpaid assessments to properly manage its accounts receivable inventory. Without such information, IRS may not be able to successfully implement these strategies and, therefore, not achieve the desired outcome. While Treasury reported that it had many significant accomplishments in improving non-tax delinquent debt collection in fiscal year 2000, the non- tax debt collections in fiscal year 2000 were about the same as in fiscal year 1999--about $2.6 billion, primarily from tax refund offsets. The performance target for fiscal year 2000 was to collect $2.08 billion. These collections came from primary collection programs administered by FMS--Treasury Offset Program and Cross-servicing. Of the total collected, about $41 million was collected through the cross-servicing program. Treasury also measured non-tax debt collection progress in terms of the amount of debt referred to FMS for collection. For example, as of September 30, 2000, agencies had referred 83 percent of delinquent debts over 180 days old reported as eligible for the Treasury Offset and Cross-servicing programs. Treasury's fiscal year 2000 target was to refer 75 percent of the amount eligible for referral. While the performance measure for total collections is a good indicator of the overall progress being made in collecting non-tax debt, it does not adequately capture important distinctions between the offset and cross- servicing programs. We suggested in our June 2000 report that combining the performance achievements of the two programs can mask potential performance issues with cross-servicing. By breaking out--in the performance report--the total collections amounts by the results of the offset program and the cross-servicing program would give decision- makers a better indication of the effectiveness of the two programs relative to the resources being applied to each program. Our prior report also suggested that breaking out total non-tax collections by amounts collected as a result of federal delinquent non-tax debt referrals and amounts collected for debts associated with state child support would give decision-makers more information on the types of debt that is being collected. As we previously reported, collections for child support represent a significant percentage of total collections and are forwarded to the states. Reporting such collections separately from amounts related to the collection of federal delinquent non-tax debts would provide a more accurate indication of FMS' performance. In addition, the amount of delinquent non-tax debt that is referred to Treasury for collection as compared with the amount of delinquent non-tax debt that is eligible for referral is not fully indicative of FMS' performance. Specifically, since the measure is an indicator of the efforts of other agencies to participate in the program, it might be unduly influenced by factors outside FMS' full control. Therefore, it could be difficult to attribute changes in the measure to the effectiveness of FMS' debt collection efforts. Treasury's fiscal year 2002 strategies in its FMS plan for increasing non-tax debt collections revolved around efforts to improve the efficiency of the cross-servicing program. For example, FMS plans to analyze the types of cross-servicing debts collected, review cross-servicing costs and fee structure, and develop a methodology to periodically evaluate the process of distributing debts to private collection agencies. FMS is also preparing audit guidance on procedures to monitor agency debt referrals. Regarding the offset program, FMS plans to expand the program by including federal salary and other payment types. However, while FMS has strategies to increase non-tax debt collections, it did not discuss a timeframe for incorporating these payments into the program. FMS' target for total non- tax debt collections is $2.3 billion for fiscal year 2001 and $2.4 billion for fiscal year 2002. Both of these targets are less than the $2.6 billion FMS collected in fiscal years 1999 and 2000. As such, it does not appear that FMS expects its planned actions for these programs to result in increased collections. It was difficult to fully gauge Treasury's progress in reducing the availability and/or use of illegal drugs because some of its performance measures did not directly measure Treasury's progress toward achieving this outcome. Treasury acknowledges that some of its measures used to track performance may not provide the best performance information and indicated that it is working toward improving performance measures. Given the measures that Treasury did use, it made some progress in reducing the availability and/or use of illegal drugs. For example, the U.S. Customs Service (Customs)--the Treasury agency primarily responsible for programs related to this outcome--exceeded its targets for three of its nine measures of illegal drugs seized. For the targets that were not met, Treasury attributed this shortfall to external factors such as "an expanding cocaine market in Europe where prices and profit margins are higher than in the United States." However, Treasury's report did not identify actions to evaluate the effects of external factors on Treasury's seizure targets and programs although it acknowledged that it would work with various federal, state, local, and international law enforcement agencies on this crosscutting outcome. Measures of illegal drugs seized provided only a partial assessment of Customs' success in reducing the availability and/or use of illegal drugs. Without an underlying measure of the amount of drugs moving into the country in total, interpretations of measures of drugs seized is problematic. This overall measure, given the clandestine and diffused nature of illegal drug traffic, is illusive even with rigorous measurement efforts. In its performance report, Treasury noted that the Office of National Drug Control Policy is developing models that will better estimate the amount of cocaine, heroin, and marijuana being smuggled into the U.S. In the meantime, Customs plans to rely on its targeting efficiency measures to quantitatively assess the effectiveness of the criteria to target potential violators--a measure applied to both air passengers and vehicles. Until better measures of Customs' performance are developed, Treasury may want to explore the relative effectiveness of several Customs anti-smuggling programs. Customs relies on intelligence, surveillance, investigations, random inspections of incoming passengers and cargo, technology, and arrangements with exporters, importers, and carriers to increase the likelihood that it will detect drugs being smuggled into the U.S. For example, Customs could compare the difference in drug detection at different border crossings where one site had a new scanning technology and another site did not have the technology. As we noted in our September 2000 report, agencies could use program evaluation for several purposes such as exploring the benefits of programs, measuring program performance, and explaining performance results. While program evaluations will also be hampered by the lack of underlying data about the flow of drugs, they might provide some indications of the comparative effectiveness of different interdiction programs. In addition, we noted in a March 2000 report that Treasury could improve processes related to its performance measures for target efficiency. In response to our recommendations, Customs stated it would collect more complete and accurate data on persons subjected to personal searches as well as closely monitor data on personal searches. While Treasury's report notes that one of its actions to increase the targeting efficiency and effectiveness is to improve training, Treasury's performance report for these measures could have included a discussion on either progress to date for collecting this data or results of its data evaluations of passengers targeted for searches in relation to its efforts to seize drugs. Treasury's fiscal year 2002 plan for Customs provided specific strategies and programs for fiscal year 2002 designed to help Customs reduce the availability and use of illegal drugs. For example, Customs plans to reduce the availability and/or use of illegal drugs by using air and sea interdiction units designed to protect our borders from the continually shifting narcotics and contraband smuggling threat. However, some measures for the strategies and programs that are designed to achieve this outcome provide an incomplete measure of performance. For example, the agency plans to measure the number of landings made by suspect aircraft that occur shortly before the aircraft crosses the border into the U.S., called short landings. The agency could refine its measure by using information about planes that are found after landing in the U.S. to have carried illegal drugs. In addition, Customs did not identify actions that are to be taken to mitigate the effects on its activities of external influences such as changes in drug smuggling routes in response to law enforcement pressures. The fiscal year 2002 performance plan does not discuss any human capital initiatives as strategies to support this outcome nor does it include information on technology initiatives for this outcome. The plan also described coordination efforts underway with another agency and annotated the performance goal to show where such crosscutting coordination occurred. As with drug flow discussed above, the clandestine nature of the underlying activities renders performance measurement in the area problematic. Thus, it is unclear whether Treasury made progress in achieving this outcome because none of the measures for this outcome directly targeted whether criminal access to firearms was reduced. For example, two measures tracked aspects of firearms-tracing activities related to crime guns--the number of firearms trace requests submitted and the average trace response time. According to the Bureau of Alcohol, Tobacco, and Firearms (ATF)--the Treasury agency responsible for programs related to this outcome--the tracing process assists law enforcement agencies in identifying possessors of recovered crime guns, and it enables ATF to develop investigative leads to identify illegal suppliers of firearms. However, neither of these measures provided an assessment of the extent to which tracing activities by ATF helped deny criminals access to firearms or reduced crime. In addition, the measures do not address one issue stated in the performance goal--community exposure to firearms-related crime. Although Treasury reported statistical data that indicated reductions in crimes committed with firearms, these data were not reported as performance measures. As discussed in an earlier section of this report, our September 2000 report noted that agencies could also use program evaluation to identify program benefits, among other uses. Treasury's fiscal year 2002 plan for ATF provided specific strategies and programs designed to help it reduce criminal access to firearms and related crime. For example, for the Integrated Violence Reduction Strategy (IVRS), the ATF strategy aims to remove violent firearms offenders from the community, deny criminals access to firearms, and prevent violence and firearms crimes through community outreach. However, this strategy is not currently addressed by the ATF performance measures, as none of these measures determine how successful the IVRS will be at denying criminals access to firearms and reducing related crimes. For example, one ATF performance measure tracks the number of firearm trace requests submitted during the fiscal year, a measure that does not provide sufficient information regarding IVRS' success at helping deny access to firearms. In addition, the fiscal year 2002 performance plan strategies to achieve this outcome do not discuss human capital or information technology initiatives. For the selected key outcomes, this section describes major improvements or remaining weaknesses in Treasury'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, the Inspectors General and others. Treasury's fiscal year 2000 performance report contained the same weaknesses that we identified in its fiscal year 1999 report and one additional limitation. However, Treasury made a few improvements. The strategic goals and objectives of IRS, FMS, Customs, and ATF were not always directly reflected in the broader departmental goals, limiting the reports' usefulness in determining whether these agencies are making progress in meeting their strategic goals in general and these outcomes in particular. When measures were dropped from use, Treasury usually did not explain the reason for the changes. When agencies did not meet their targets, Treasury provided only brief explanations for the shortfalls. In general, for fiscal year 2000, a full understanding of the reasons for the shortfalls in performance was either not provided or was speculative. For example, in explaining why IRS did not meet its target for overall quality of field examination cases, Treasury stated the obvious--that it was unable to meet new quality standards. The reports generally did not discuss crosscutting issues or the impact of external factors on Treasury's abilities to meet its targets. For example, Customs did not identify actions to mitigate the effects on its activities of external influences, such as changes in drug smuggling routes in response to law enforcement pressures. The reports provided minimal assurance that the performance information and data reported was credible by inserting an overall data accuracy statement at the beginning of the report. Data accuracy is one of several important elements to consider when examining the quality of agency performance data. However, decision-makers may need more detailed explanations about such things as data validity, completeness, consistency, timeliness, and/or access. As we noted earlier in this report, our audit of IRS' fiscal year 2000 financial statements raised questions about the reliability and accuracy of some of IRS' performance indicator data. Unlike the fiscal year 1999 report, the fiscal year 2000 report did not fully discuss the findings of any program evaluations performed. Instead, the report provides brief summaries of four evaluations as examples. Treasury made two changes that strengthened its presentation of program performance data in general and also increased consistency with agency strategic goals. First, Treasury elevated its objective of Improve Customer Satisfaction to a strategic goal. Second, it added a strategic goal of Improve Employee Satisfaction. Treasury's fiscal year 2002 performance plans for its agencies contained the same weaknesses that we identified in its fiscal year 2001 report. First, the performance goals and measures of Treasury's agencies will still not provide much results-oriented information related to broader departmental goals. Second, the performance plan sections on IRS and FMS provided minimal information on each measure's data source, accuracy, and limitations, among other things. The sections on Customs and ATF presented more data-related information than was presented in the IRS section. However, while Customs and ATF discussed the source and accuracy of the data, they did not present complete assessments. For example, the Treasury performance plan did not discuss data collection and storage, data validation and verification, or data limitations. Under the Reports Consolidation Act of 2000 (P.L. 106-531) agencies are to assess the completeness and reliability of the performance data included in their reports. The assessments are to describe any material inadequacies in the completeness and reliability of the performance data, and the actions the agency can take and plans to take to resolve such inadequacies. Third, the sections generally did not describe program evaluations currently underway and how they would be used to assess agency performance. Only the outcome on reducing the availability and use of illegal drugs was affected by changes in Treasury's performance plans for its agencies. These measures attempt to better link performance with this outcome but they may not provide complete information. For example, one of these measures tracks the number of suspect aircraft that land short of the U.S. border, an indicator that Customs' interdiction effort is successful. While the number of short landings is an indicator of successful reduction in the availability of illegal drugs, Customs should also consider measuring the number of suspect aircraft that actually make it past the border to deliver their illegal drug cargo. GAO has identified two governmentwide high-risk areas: human capital and information security. Regarding human capital, we found that Treasury's performance plan had one measure related to human capital which was to measure the extent to which Treasury has implemented a new human resources system. With respect to information security, we found that Treasury's performance plan had one related goal and measure that captured the percent of all Treasury information technology systems that are certified and accredited to operate. In addition, Treasury addressed this management challenge at the individual agency level, as discussed in app. I. In addition, GAO has identified five major management challenges facing the Department of the Treasury. We found that Treasury's performance report discussed the agency's progress in resolving its challenges. Of the agency's seven major management challenges, identified by GAO, its performance plan had (1) goals and measures that were directly related to one of the challenges, (2) had goals and measures that were indirectly applicable to five of the challenges (3) had no goals and measures related to one of the challenges, but discussed strategies to address it. As agreed, our evaluation was generally based on 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 Treasury's operations and programs, GAO identification of best practices concerning performance planning and reporting, and our observations on Treasury's other GPRA- related efforts. We also discussed our review with agency officials in IRS, FMS, Customs, ATF, and the Treasury's 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 do not reflect the outcomes for all of Treasury's programs or activities. We also used information from our January 2001 report on major management challenges and program risks for Treasury, and similar reports by Treasury's Inspector General and the Treasury Inspector General for Tax Administration to identify challenges related to the outcomes we reviewed. We did not independently verify the information contained in the performance report and plan, although we did draw from other GAO work in assessing the validity, reliability, and timeliness of Treasury's performance data. We conducted our review from April 2001 through June 2001 in accordance with generally accepted government auditing standards. We discussed this report with Treasury officials on June 5, 2001, and received written comments on it. The full text of Treasury's written comments is in appendix II. Treasury noted that it appreciated our reviews and insight on how it can make its GPRA products more useful. Treasury divided its comments into two categories, general and specific. Regarding the general comments, Treasury expressed agreement that it needs to use program evaluation to determine the impact of its programs on outcomes. It also expects to improve the link between agency measures and Treasury goals and objectives by using information from a review of its measures that it plans to conduct as part of the fiscal year 2003 budget. While we are not recommending specific measures to Treasury at this time, we are available to work with Treasury on performance measurement issues. In addition, Treasury plans to take steps to ensure data validity for each of its performance measures by reviewing its control processes. We agree that such a step is useful. As part of that review, Treasury may also want to identify and implement changes to ensure that its performance measurement data are relevant, timely, and accurate. Treasury also noted that it continues to face conflicting pressures to keep its GPRA products streamlined and yet to include more detailed information; Treasury characterized our position as one desiring considerably more detail in their GPRA products. We agree that it is difficult to strike a balance in order to provide information that is useful and easily understood yet is sufficiently inclusive. However, we believe that it is only after Treasury establishes the information basic to a GPRA orientation such as its (1) planned outcomes, (2) actions to accomplish the outcomes, and (3) measures that are meaningful and reliable indicators of progress that presentation issues should be addressed. Producing documents that are responsive to GPRA requirements is an additional consideration. Treasury made a number of specific comments that provide additional perspective on issues that we discuss in the report. We note below those instances where Treasury disagreed with a point we made and where we incorporated technical clarifications as appropriate. Administration of Tax Law. Treasury agreed that it needs to further develop measures for this outcome. We recognize that development of such measures is difficult. EITC. Treasury agreed that it lacks performance measures for the EITC program and describes other measures that it uses in managing the program. However, as we note in the report, without performance measures and an evaluation strategy, Treasury will not be able to assess progress in achieving less waste, fraud, and error in the program. Delinquent Tax Collection. Treasury commented that IRS' reorganization, new mission, and strategic goals caused IRS to find methods of measuring success without considering dollars collected. Treasury went on to note that for various reasons, IRS' traditional debt collection activities have declined and that with additional staffing it has been authorized, IRS believes it will realize significant improvement in critical debt collection areas by the end of fiscal year 2002. While IRS' current performance measures provide some perspective on its collections success, we believe, as explained in our report, that some measures that consider whether IRS is collecting the correct amount of taxes under proper collection procedures would provide a more balanced performance perspective. Non-tax Debt Collection. Treasury disagreed with our assessment that one of its measures--involving a comparison of delinquent non-tax debts referred and eligible for referral--for this outcome is not a good gauge of success. While we agree that FMS has spent considerable resources working with other agencies so that the agencies will refer their debt, it is also true that the measure is unduly influenced by factors outside FMS' full control. We modified the wording in our report to better reflect our concern about that measure. Customs Drug Interdiction Program. Treasury disagreed with our statement that some of its performance measures were not linked directly to its goals. In response, we revised our wording to better articulate our assessment of the progress Treasury has made in achieving its outcomes. Personal Search Data. Treasury provided additional perspective on its efforts in response to our previous recommendation related to its performance measures for target efficiency. Short Landings. Treasury disagreed with our assessment that some of its drug interdiction performance measures do not support the outcome of reduced drug availability. It also took issue with our use of an example regarding the performance measure on the number of suspect aircraft that land shortly before crossing the border into the U.S. The intent of the example was to illustrate the need for better outcome measures, a need that Treasury acknowledged in its comments. We clarified our wording in the report. Automated Commercial Environment (ACE). We deleted reference to the development of the ACE initiative, as suggested by Treasury. Data Accuracy, Incomplete Assessment. At Treasury's request, we revised the report to include an example of components of an assessment of data issues. FMS' Computer Security. Treasury provided information in its comments about the performance measures it established for its Information Technology Security Program in the Self- Assessment Framework. While that action is commendable, it does not substitute for performance measures in Treasury's performance report or plan. We clarified this point in our report. FMS Non-compliance with the Federal Financial Management Improvement Act (FFMIA). Treasury acknowledged that its financial management systems did not comply with FFMIA and that it is addressing deficiencies through a remediation plan and corrective actions. While those actions are commendable, they do not substitute for performance measures in Treasury's performance report or plan. 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 Honorable Paul H. O'Neill; and the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget. Copies will also be made available at www.gao.gov. If you or your staff have any questions, please call me at (202) 512-9110. Key contributors to this report were Ralph T. Block, Kerry Gail Dunn, and Elwood D. White. Additional staff acknowledgments are listed in app. III. The following table identifies the major management challenges confronting the Department of the Treasury, which includes the government-wide high-risk areas of human capital and information security. The first column of the table lists the management challenges that we and/or the Department of the Treasury's Office of Inspector General (OIG) or Treasury Inspector General for Tax Administration (TIGTA) have identified. Treasury has two offices of Inspector General-- TIGTA, which covers the Internal Revenue Service and the OIG, which covers all other Treasury bureaus. The second column discusses what progress, as discussed in its fiscal year 2000 performance report, Treasury made in resolving its challenges. The third column discusses the extent to which Treasury's fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and the two Treasury IGs identified. We found that Treasury's performance report discussed the agency's progress in resolving many of its challenges, but it did not discuss the agency's progress in resolving the following challenge: Strategic Human Capital Management. Of the agency's 16 major management challenges, its performance plan had goals and measures that were directly related to five of the challenges, goals and measures that were indirectly applicable to five of the challenges and no goals and measures related to six of the challenges, but discussed strategies to address them. In addition to those named in the report, Mark T. Bird, Charles R. Fox, Meafelia P. Gusukuma, Gary N. Mountjoy, Paula M. Rascona, Gregory C. Wilshusen, and Ellen T. Wolfe made contributions to this report.

This report reviews the Department of the Treasury's fiscal year 2000 performance report and fiscal year 2002 performance report plan required by the Government Performance and Results Act. Specifically, GAO discusses Treasury's progress in addressing several key outcomes that are important to Treasury's mission. In general, GAO could not adequately determine Treasury's progress on five key outcomes because the fiscal year 2000 performance report lacked at least some measures needed to directly assess each of the outcomes. However, other information that GAO reviewed and GAO's past work suggest that Treasury may be at risk of not achieving these outcomes. In assessing Treasury's strategies, GAO identified shortcomings in its plans for each of the outcomes it reviewed. Chief among the limitations common to both the Treasury's fiscal year 1999 and 2000 performance reports was that the performance goals and measures of Treasury's agencies were not always directly reflected in the broader departmental goals, limiting the reports' usefulness in determining whether these agencies are making progress in meeting their strategic goals in general and the outcomes GAO reviewed in particular. Treasury improved the fiscal year 2000 report by elevating its objective of Improve Customer Satisfaction to a strategic goal and adding a strategic goal of Improve Employee Satisfaction. Treasury's performance report discussed the progress made in resolving many of its major management challenges, but it did not specifically discuss the agency's progress in resolving challenges related to strategic human capital management.

The commercial space launch industry continues to develop and evolve, with changes in technology and facilities. Historically, commercial space launches carried payloads, generally satellites, into orbit using expendable launch vehicles that did not return to earth. Figure 1 shows examples of expendable launch vehicles. However, launch companies are testing reusable elements of expendable launch vehicles. For example, after launch, SpaceX has recovered four Falcon 9 first stages-- three on a barge located at sea and one on land, according to FAA. United Launch Alliance is also developing capabilities to reuse the first stage of its Vulcan launch vehicle. Since the Space Shuttle fleet was retired in 2011, NASA has procured commercial cargo transportation services to the International Space Station from commercial providers such as SpaceX and Orbital ATK on these types of vehicles. In addition, the commercial space launch industry is further changing technology with the emergence of suborbital reusable launch vehicles that are capable of being launched into space more than once and could be used for space tourism. Several companies such as Virgin Galactic, Blue Origin, and XCOR are in the process of developing and testing manned, reusable launch vehicles for commercial space tourism. For example, according to Blue Origin it has launched, recovered, and re- flown the same booster four times. Companies like Virgin Galactic and Stratolaunch Systems are also developing vehicles that will have the capability to launch small satellites into orbit. See figure 2. Further, private companies and states are developing commercial spaceports--sites used for commercial space launches to support the expected growth in the launch industry. See figure 3. FAA's primary means of authorizing space launch activities is through its licensing process which includes: licensing launch and reentry vehicle operations, reviewing applications for experimental permits, reviewing safety approvals, and conducting safety inspections and oversight of licensed and permitted activities, among other activities. For fiscal year 2016 for the Office of Commercial Space Transportation, FAA's budget request was $18.1 million and 92 full-time equivalent positions. Congress provided $17.8 million for commercial space activities for fiscal year 2016. The federal government is authorized to provide catastrophic loss protection in the event of a launch accident for all FAA-licensed commercial launches through the Commercial Space Launch Amendments Act as amended. Thus, subject to congressional appropriations, the U.S. government may pay third-party liability claims for injury, damage, or loss that result from a commercial launch-related accident in excess of the required "maximum probable loss," an amount which is calculated by FAA and is capped at $500 million per launch. The federal government, subject to the availability of appropriations, is then liable for claims over the maximum probable loss up to $1.5 billion which when adjusted for post-1988 inflation is about $3.06 billion in 2015 dollars. Launch companies are responsible for third-party liability claims up to the maximum probable loss and over $3.06 billion. Figure 4 illustrates this regime. FAA's risk methodology to calculate the maximum probable loss uses an "overlay" method that entails reviewing the specific circumstances of the launch including the planned launch vehicle, launch site, payload, flight path, and the potential casualties and fatalities that could result from varying types of launch failures at different points along that path. There has not been a commercial launch-related accident that has invoked indemnification and thus the federal government has not paid any third-party liability claims to date. As we reported in our 2015 report, during the last decade, U.S. companies conducted fewer orbital commercial launches in total than companies in Russia or Europe, which are among the main foreign competitors. However, in recent years such as 2014 and 2015, U.S. companies have conducted an increasing number of orbital commercial launches. As shown in figure 4, the number of orbital launches conducted by U.S. companies varied over the last 11 years. For example, recently the number of launches increased from zero in 2011 to eight in 2015. In 2015, U.S. companies conducted more orbital launches than companies in Russia, which conducted five, or Europe, which conducted six. In 2015 we found that a number of factors are responsible for the recent expansion of the U.S. commercial space launch industry. First, increase in demand through federal government contracts, such as NASA's commercial cargo program, have supported the industry and have resulted in an increase in the number of U.S. commercial launches. For example, in 2015, SpaceX conducted three cargo resupply missions for NASA. NASA also procured eight launches from Orbital ATK in 2008 that were scheduled to occur between 2014 and 2016 with one launch taking place in 2015, one launch taking place in 2016, and another scheduled for July 2016. In addition, in January 2016, NASA announced its selections for companies to conduct Commercial Resupply Services (CRS2) to the ISS. SpaceX and Orbital ATK were selected again, and Sierra Nevada Corporation was added as a new participant. According to NASA, these awards require a minimum of six missions to the ISS from each participant between 2019 and 2024. In addition to fulfilling government contracts, these companies also conduct launches for other customers, including international customers. Second, according to representatives from two commercial space launch companies, including SpaceX, and an advisory group and an expert whom we interviewed for our 2015 report, the growth in the U.S. commercial space launch industry is largely due to SpaceX because it is more price competitive compared with foreign launch providers. The Chairman of the Commercial Space Transportation Advisory Committee said that SpaceX's prices are significantly lower than foreign providers. Some companies are seeking ways to further reduce costs. For example, Blue Origin is developing new main engine elements for United Launch Alliance's expendable launch vehicle. Representatives from one company and an industry association and an expert told us that reusable stages may further lower launch prices. In previous work, we reported that-- according to industry stakeholders--launch prices, along with launch vehicle reliability, were the major factors that customers focus on when selecting launch providers. Third, the emerging space tourism industry and small satellite industry in the United States also may help the U.S. commercial space launch industry expand. As noted earlier, some U.S. companies are developing launch vehicles to carry spaceflight participants on suborbital flights and to place small satellites into orbit. In our 2015 report, we asked FAA officials, representatives from nine commercial space launch companies, and three experts to identify the challenges that FAA faces--and is likely to face in the near future--to address significant developments in the commercial space launch industry over the last decade. The challenges for FAA that they identified included: (1) determining whether and when to regulate the safety of crew and spaceflight participants and (2) handling an increased workload relating to licensing and permitting launches and launch sites. In addition, in our 2015 report, we noted that changes in the number and types of commercial space launches could affect the government's overall exposure and indemnification for launches. Determining whether and when to regulate the safety of crew and spaceflight participants: In 2014, FAA released a set of recommended practices on human spaceflight occupants' safety that the agency indicated could be a starting point for the industry to develop standards, or if needed, for FAA to develop regulations. In 2015, we reported that FAA officials said that the agency did not have plans to issue regulations regarding the safety of crew and spaceflight participants but was looking to industry to develop industry consensus standards detailing validation and verification criteria that are needed to implement the agency's recommended practices. As part of the U.S. Commercial Space Launch Competitiveness Act, Congress required FAA in consultation with an industry advisory group--the Commercial Space Transportation Advisory Committee--to submit two reports to Congress on this topic. The first report is on metrics that could indicate FAA's and the industry's readiness to transition to a safety framework that may include regulating crew, government astronaut and spaceflight participant safety and is due by August 2016. The second report is on the industry's progress in developing voluntary industry consensus standards and is required to be submitted by December 31, 2016 and periodically afterwards until December 31, 2021. Increased workload relating to licensing and permitting launches and launch sites: Licensing more launches: In fiscal year 2015, FAA licensed and permitted 14 launches and re-entries, up from seven in fiscal year 2006 and compared with an average of about 11 launches and re- entries during each fiscal year from 2006 to 2015. We found a large part of this increase was due to launches for NASA's commercial cargo program. In the future, FAA also will need to license launches for NASA's commercial crew program and potentially launches of companies placing small satellites in orbit. Conducting more inspections: In fiscal year 2015, FAA conducted 216 commercial launch inspections, up from 27 in fiscal year 2006 and compared with an average of 90 inspections during each fiscal year from 2006 to 2015. Officials said that FAA has conducted more safety inspections, especially those associated with pre-launch and reentry activities, to allow the agency to identify safety issues early for correction and to avoid launch companies' noncompliance with regulations and the conditions set forth in the launch license. FAA conducts different types of inspections such as launch and reentry operations and launch site operations, and FAA inspectors are present at launches. Licensing new types of vehicles and technologies: Companies are developing a variety of new vehicles and technologies. For example, the space tourism industry is developing hybrid launch systems such as SpaceShipTwo, which have elements of both aircraft and rocket-powered components. Some companies are also testing autonomous flight safety systems, which would allow a launch vehicle that is off course to be terminated without humans taking action. Most licensed launches as of August 2015 have involved flight termination systems that were human- operated. Licensing more and complex launch sites: Although launch sites traditionally have been located in coastal areas at federal launch facilities, in 2014 FAA licensed an inland launch site that is co- located with a commercial airport in Midland, Texas. In addition, FAA is licensing more nonfederal launch sites. As of June 2015, there were 10 FAA-licensed commercial launch sites, compared with six in 2006. In addition, as of May 2015, FAA had received partial applications for four additional launch sites. Also, in our 2015 report we noted that changes in the number and types of commercial space launches could affect the government's overall exposure and indemnification for launches for several reasons. First, the number of launches and reentries covered by federal indemnification is forecasted to increase and the federal government's potential exposure to third-party liability claims would increase with the added volume. In general, by increasing the volume of launches and reentries, the probability of a catastrophic accident occurring is also increased. A catastrophic accident could result in third-party losses over the maximum probable loss, which would invoke federal indemnification. Second, forecasted types of launches and reentries include newly developed launch vehicles that have a shorter launch history than "legacy" launch vehicles. For example, Virgin Galactic's SpaceShipTwo, XCOR's Aerospace's Lynx, and Blue Origin's New Shepard are new vehicles. However, increased flights of a launch vehicle could also make a vehicle more reliable. We have previously reported that although some industry changes may alter the government's exposure, an accurate maximum probable loss calculation will mitigate the effects to some extent. If the maximum probable loss calculation is accurate, the estimated losses will adjust for the risk profile of each license, in such a way that the likelihood the government would indemnify a third-party remains the same regardless of the industry change. However, in July 2012, we reported that FAA's risk methodology--which was first established in the 1980s-- could be updated given advances in catastrophe modeling. We recommended that FAA review its maximum probable loss methodology. Congress mandated that FAA review the methodology and report back to the Congress by May 2016. FAA officials told us that in June 2016 that they have drafted a report which is currently under agency review. In 2015 we found that FAA's budget requests for its commercial space launch activities generally were based on the number of projected launches, but that in recent years the actual number of launches was much lower than FAA's projections. For example, during 6 of the 10 years from fiscal years 2005 to 2014, FAA generally based its budget submissions on the number of launches that it was projecting for the following year; none of those projections was realized in the actual number of licensed and permitted launches. FAA officials said at that time that although other metrics existed besides the number of projected launches, they were not consistently used in the agency's budget submissions. In addition, other activities, such as time spent on pre- application license consultations, were not included in the metrics used in preparing the budget requests. According to FAA officials, more detailed information was not provided in their budget submissions because the agency lacked certain workload metrics regarding its commercial space launch oversight activities. We also found that the Office of Commercial Space Transportation did not track the amount of time spent on the office's various activities. However, the officials indicated that they were continuing to develop a labor analysis methodology that began in fiscal year 2014 and that the office was considering implementing a new time recordkeeping system in 2016 to supplement the development of additional workload metrics. To provide Congress with more information about the resources requested to address developments in the commercial space launch industry, we recommended that FAA provide more detailed information in its budget submissions about its workload. FAA agreed with the recommendation, but DOT also had some concerns about how issues were presented. FAA has taken steps to implement our recommendation. In the 2017 budget submission, FAA provided workload indices based on the number of authorizations which the agency uses to authorize companies to conduct one or more launches, the number of licenses and permits, the number of on-site inspections as part of licensing launch sites, and staffing levels since fiscal year 2006. We will continue to monitor FAA's progress toward implementing this recommendation. 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: Catherine Colwell, Bob Homan, Dave Hooper, Maureen Luna-Long, Stephanie Purcell, Namita Bhatia Sabharwal, and Travis Schwartz. 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. commercial space launch industry has changed considerably since the enactment of the Commercial Space Launch Amendments Act of 2004. FAA is required to license or permit commercial space launches; however, to allow space tourism to develop, the act prohibited FAA from regulating crew and spaceflight participant safety before 2012--a moratorium that was extended to 2023. The U.S. Commercial Space Launch Competitiveness Act, enacted in November 2015, addressed other aspects of the commercial space launch industry. This testimony summarizes and updates findings from GAO's 2015 report, specifically industry developments and FAA challenges, including FAA's launch licensing workload and budget. For its 2015 report, GAO reviewed FAA's guidance on its launch permit, licensing, and safety oversight activities; interviewed FAA officials, industry stakeholders, and experts who were selected on the basis of their knowledge of FAA's oversight of the commercial space launch industry; and visited spaceports where two 2014 launch mishaps occurred. To update this information GAO reviewed FAA information on the industry and FAA's budget request. In 2015, GAO reported that during the last decade, U.S. commercial space launch companies conducted fewer orbital launches in total than companies in Russia or Europe, which are among their main foreign competitors. However, the U.S. commercial space launch industry has expanded recently. In 2015, U.S. companies conducted eight orbital launches, compared with none in 2011. In addition, in 2015, U.S. companies conducted more orbital launches than companies in Russia, which conducted five, or Europe, which conducted six. In 2015, GAO reported that the Federal Aviation Administration (FAA)--which is responsible for protecting the public with respect to commercial space launches, including licensing and permitting launches--faces challenges. According to FAA officials and industry stakeholders, FAA faces an increasing workload licensing and permitting launches for transporting cargo, and in the future, crew for NASA's commercial space programs, space tourism, and potentially launching small satellites. FAA also faces the challenges of whether and when to regulate the safety of crew and spaceflight participants--in 2015 Congress extended the moratorium to 2023--and overseeing new types of vehicles and technologies. (See figure for commercial space launch vehicles.) Challenges also include updating FAA's method to calculate maximum probable loss--the amount above which the federal government indemnifies the industry for catastrophic loss. Virgin Galactic's SpaceShipTwo and SpaceX's Falcon 9 GAO reported in 2015 that FAA's budget requests for its commercial space launch activities generally were based on the number of projected launches, but that in recent years the actual number of launches was much lower than FAA's projections. GAO also reported that, according to FAA officials, more detailed information was not provided in FAA's budget submissions because the agency lacked information on its workload overseeing commercial space launch activities. In addition, GAO reported that the Office of Commercial Space Transportation did not track the amount of time spent on various activities. FAA has taken steps to implement GAO's recommendation that it provide more detailed information in its budget submissions regarding commercial space transportation activities. In its 2017 budget submission, FAA provided workload indices regarding authorizations under which companies conduct one or more launches; on-site inspections; licensing of spaceports; and staffing levels since 2006.Why GAO Did This Study In 2015, GAO recommended that FAA, in its budget submissions, provide more detailed information about the Office of Commercial Space Transportation's workload. FAA agreed with the recommendation. GAO is not making new recommendations in this testimony.

The 1987 Act requires that an individual or entity be actively engaged in farming in order to receive farm program payments. To be considered actively engaged in farming, the act requires an individual or entity to provide a significant contribution of capital, land, or equipment, as well as a significant contribution of personal labor or active personal management to the farming operation. Hired labor or hired management may not be used to meet the latter requirement. The act's definition of a "person" eligible to receive farm program payments includes an individual, as well as certain kinds of corporations, partnerships, trusts, or similar entities. Recipients must also demonstrate that their contributions to the farming operation are in proportion to their share of the operation's profits and losses and that these contributions are at risk. The 1987 Act also limits the number of entities through which a person can receive program payments. Under the act, a person can receive payments as an individual and through no more than two entities, or through three entities and not as an individual. The statutory provision imposing this limit is commonly known as the three-entity rule. Under the Farm Security and Rural Investment Act of 2002, "persons"--individuals or entities--are generally limited to a total of $180,000 annually in farm program payments, or $360,000 if they are members of up to three entities. Some farming operations may reorganize to overcome payment limits to maximize their farm program benefits. Larger farming operations and farming operations producing crops with high payment rates, such as rice and cotton, may establish several related entities that are eligible to receive payments. However, each entity must be separate and distinct and must demonstrate that it is actively engaged in farming by providing a significant contribution of capital, land or equipment, as well as a significant contribution of personal labor or active personal management to the farming operation. Within USDA, the Farm Service Agency (FSA) is responsible for enforcing the actively engaged in farming and payment limitation rules. FSA field offices review a sample of farming plans at the end of the year to help monitor whether farming operations were conducted in accordance with approved plans, including whether payment recipients met the requirement for active engagement in farming and whether the farming operations have the documents to demonstrate that the entities receiving payments are in fact separate and distinct legal entities. FSA selects its sample of farming operations based on, among other criteria, (1) whether the operation has undergone an organizational change in the past year by, for example, adding another entity or partner to the operation and (2) whether the operation receives payments above a certain threshold. These criteria have principally resulted in sampling farming operations in areas that produce cotton and rice--Arkansas, California, Louisiana, Mississippi, and Texas. Many recipients meet one of the farm program payments' eligibility requirements by asserting that they have made a significant contribution of active personal management. Because FSA regulations do not provide a measurable, quantifiable standard for what constitutes a significant management contribution, people who appear to have little involvement are receiving farm program payments, according to our survey of FSA field offices and our review of 86 case files. Indeed, most large farming operations meet the requirement for personal labor or active personal management by asserting a significant contribution of management. Survey respondents provided information on 347 partnerships and joint ventures for which FSA completed compliance reviews in 2001; these entities comprised 992 recipients, such as individuals and corporations that were members of these farming operations. Of these 992 recipients, 46 percent, or 455, asserted that they contributed active personal management; 1 percent, or 7, asserted that they contributed personal labor; and the remaining 53 percent (530) asserted they provided a combination of active personal management and personal labor to meet the actively engaged in farming requirement. While FSA's regulations define active personal management more specifically to include such things as arranging financing for the operation, supervising the planting and harvesting of crops, and marketing the crops, the regulations lack measurable criteria for what constitutes a significant contribution of active personal management. FSA regulations define a "significant contribution" of active personal management as "activities that are critical to the profitability of the farming operation, taking into consideration the individual's or entity's commensurate share in the farming operation." In contrast, FSA provides quantitative standards for what constitutes a significant contribution of active personal labor, capital, land, and equipment. For example, FSA's regulations define a significant contribution of active personal labor as the lesser of 1,000 hours of work annually, or 50 percent of the total hours necessary to conduct a farming operation that is comparable in size to such individual's or entity's commensurate share in the farming operation. By not specifying quantifiable standards for what constitutes a significant contribution of active personal management, FSA allows recipients who may have had limited involvement in the farming operation to qualify for payments. Some recipients appeared to have little involvement with the farming operation for 26 of the 86 FSA compliance review files we examined in which the recipients asserted they made a significant contribution of active personal management to the farming operation. For example, in 2001, 11 partners in a general partnership operated a farm of 11,900 acres. These partners asserted they met the actively engaged in farming requirement by making a significant contribution of equipment and active personal management. FSA's compliance review found that all partners of the farming operation were actively engaged in farming and met all requirements for the approximately $1 million the partnership collected in farm program payments in 2001. However, our review found that the partnership held five management meetings during the year, three in a state other than the state where the farm was located, and two on-site meetings at the farm. Some of the partners attended the meetings in person while others joined the meetings by telephone conference. Although all 11 partners claimed an equal contribution of management, minutes of the management meetings indicated seven partners participated in all five meetings, two participated in four meetings, and two participated in three meetings. All partners resided in states other than the state where the farm was located, and only one partner attended all five meetings in person. Based on our review of minutes documenting the meetings, it is unclear whether some of the partners contributed significant active personal management. If FSA had found that some of the partners had not contributed active personal management, the partnership's total farm program payments would have been reduced by about 9 percent, or $90,000, for each partner that FSA determined was ineligible. State FSA officials agreed that the evidence to support the management contribution for some partners was questionable and that FSA reviewers could have taken additional steps to confirm the contributions for these partners. According to our survey of 535 FSA field offices, FSA could make key improvements to strengthen the management contribution standard. These offices reported that the management standard can be strengthened by clarifying the standard, including providing quantifiable criteria, certifying actual contributions, and requiring management to be on-site. More than 60 percent of those surveyed, for example, indicated that clarifying the standard would be an improvement. In addition, in 2003, a USDA commission established to look at the impact of changes to payment limitations concluded that determining what constitutes a significant contribution of active management is difficult and lack of clear criteria likely makes it easier for farming operations to add recipients in order to avoid payment limitations. We also found that some individuals or entities have engaged in transactions that might constitute schemes or devices to evade payment limitations, but neither FSA's regulations nor its guidance address whether such transactions could constitute schemes or devices. Under the 1987 Act as amended, if the Secretary of Agriculture determines that any person has adopted a "scheme or device" to evade, or that has the purpose of evading, the act's provisions--in other words, the payment limitations--then that person is not eligible to receive farm program payments for the year the scheme or device was adopted and the following crop year. According to FSA's regulations, this statutory provision includes (1) persons who adopt or participate in adopting a scheme or device and (2) schemes or devices that are designed to evade or have "the effect of evading" payment limitation rules. The regulations state that a scheme or device shall include concealing information that affects a farm program payment application, submitting false or erroneous information, or creating fictitious entities for the purpose of concealing the interest of a person in a farming operation. We found several large farming operations that were structured as one or more partnerships, each consisting of multiple corporations that increased farm program payments in a questionable manner. The following two examples illustrate how farming operations, depending on how the FSA regulations are interpreted, might be considered to evade, or have the effect of evading, payment limitations. In one case, we found that a family had set up the legal structures for its farming operation and also owned the affiliated nonfarming entities. This operation included two farming partnerships comprising eight limited liability companies. The two partnerships operated about 6,000 acres and collected more than $800,000 in farm program payments in 2001. The limited liability companies included family and non-family members, although power of attorney for all of the companies was granted to one family member to act on behalf of the companies, and ultimately the farming partnerships. The operation also included nonfarming entities--nine partnerships, a joint venture, and a corporation--that were owned by family members. The affiliated nonfarming entities provided the farming entities with goods and services, such as capital, land, equipment, and administrative services. The operation also included a crop processing entity to purchase and process the farming operation's crop. According to our review of accounting records for the farming operation, both farming partnerships incurred a small net loss in 2001, even though they had received more than $800,000 in farm program payments. In contrast, average net income for similar- sized farming operations in 2001 was $298,000, according to USDA's Economic Research Service. The records we reviewed showed that the loss occurred, in part, because the farming operations paid above-market prices for goods and services and received a net return from the sale of the crop to the nonfarming entities that appeared to be lower than market prices because of apparent excessive charges. The structure of this operation allowed the farming operation to maximize farm program payments, but because the farm operated at a loss these payments were not distributed to the members of the operation. In effect, these payments were channeled to the family-held nonfarming entities. Figure 1 shows the organizational structure of this operation and the typical flow of transactions between farming and nonfarming entities. Similarly, we found another general partnership that farmed more than 50,000 acres in 2001 and that conducted business with nonfarming entities, including a land leasing company, an equipment dealership, a petroleum distributorship, and crop processing companies, with close ties to the farming partnership. The partnership, which comprised more than 30 corporations, collected more than $5 million in farm program payments in 2001. The shareholders who contributed the active personal management for these corporations were officers of the corporations. Each officer provided the active personal management for three corporations. Some of these officers were also officers of the nonfarming entities--the entities that provided the farming partnership goods and services such as the capital, land, equipment, and fuel. The nonfarming entities also included a gin as well as grain elevators to purchase and process the farming partnership's crops. Our review of accounting records showed that even though the farming partnership received more than $5 million in farm payments, it incurred a net loss in 2001, which was distributed among the corporations that comprised the partnership. As in the first example, factors contributing to the loss included the above- market prices for goods and services charged by the nonfarming entities and the net return from the sale of crops to nonfarming entities that appeared to be lower than market prices because of apparent excessive charges for storage and processing. For example, one loan made by the nonfarming financial services entity to the farming partnership for $6 million had an interest rate of 10 percent while the prevailing interest rate for similar loans at the time was 8 percent. Similarly, the net receipts from the sale of the harvested crop, which were sold almost exclusively to the nonfarming entities, were below market price. For example, in one transaction the gross receipt was about $1 million but after the grain elevators deducted fees for the quality of the grain and such actions as drying and storing the grain, the net proceeds to the farming entity were only about $500,000. In this particular operation, all of the nonfarming entities had common ownership linked to one individual. This individual had also set up the legal structure for the farming entities but had no direct ownership interest in the farming entities. It is unclear whether either of these operations falls within the statutory definition of a scheme or device or whether either otherwise circumvents the payment limitation rules. State FSA officials in Arkansas, Louisiana, Mississippi, and Texas, where many of the large farming operations are located, believed that some large operations with relationships between the farming and nonfarming entities were organized primarily to circumvent payment limitations. In this manner, these farming operations may be reflective of the organizational structures that some Members of Congress indicated were problematic when enacting the 1987 Act and the scheme or device provision. The House Report for the 1987 Act states: "A small percentage of producers of program crops have developed methods to legally circumvent these limitations to maximize their receipt of benefits for which they are eligible. In addition to such reorganizations, other schemes have been developed that allow passive investors to qualify for benefits intended for legitimate farming operations." In our discussions with FSA headquarters officials in February 2004 on the issue of farming operations that circumvent the payment limitation rules, they noted that while an operation may be legally organized, it may be misrepresenting who in effect receives the farm program payments. FSA has no data on how many of the types of operations that we identified exist. However, FSA is reluctant to question these operations because it does not believe current regulations provide a sufficient basis to take action. Other FSA officials said that USDA could review such an operation under the 1987 Act's scheme or device provision if it becomes aware that the operation is using a scheme or device for the purpose of evading the payment limitation rules. However, these FSA officials stated it is difficult to prove fraudulent intent--which they believe is a key element in proving scheme or device--and requires significant resources to pursue such cases. In addition, they stated that even if FSA finds a recipient ineligible to receive payments, its decision might be overturned on appeal within USDA. The FSA officials noted that when FSA loses these types of cases, the loss tends to discourage other field offices from aggressively pursuing these types of cases. It is not clear whether either the statutory provision or FSA's regulations require a demonstration of fraudulent intent in order to find that someone has adopted a scheme or device. As discussed above, the statute limits payments if the Secretary of Agriculture determines that any person has adopted a scheme or device "to evade, or that has the purpose of evading," the farm payment limitation provisions. The regulations state that payments may be withheld if a person "adopts or participates in adopting a scheme or device designed to evade or that has the effect of evading" the farm payment limitations. The regulations note that schemes or devices shall include, for example, creating fictitious entities for the purpose of concealing the interest of a person in a farming operation. Some have interpreted this provision as appearing to require intentionally fraudulent or deceitful conduct. On the other hand, FSA regulations only provide this as one example of what FSA considers to be a scheme or device. The regulations do not specify that all covered schemes or devices must involve fraudulent intent. As previously stated, covered schemes or devices under FSA regulations include those that have "the effect of evading" payment limitation rules. Finally, guidance contained in FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40, does not clarify the matter because it does not provide any additional examples for FSA officials of the types of arrangements that might be considered schemes or devices. This lack of clarity over whether fraudulent intent must be shown in order for FSA to deny payments under the scheme or device provision of the law may be inhibiting FSA from finding that some questionable operations are schemes or devices. In addition to the weaknesses described above, FSA does not effectively oversee farm program payments in five key areas, according to our analysis of FSA compliance reviews and our survey of FSA field offices. First, FSA does not review a valid sample of recipients to be reasonably assured of compliance with the payment limitations. In 2001, FSA selected 1,573 farming operations from its file of 247,831 entities to review producers' compliance with actively engaged in farming requirements. FSA's sample selection focuses on entities that have undergone an organizational change during the year or received large farm program payments. Field staff responsible for these reviews seek waivers for farming operations reviewed within the last 3 to 5 years--the time frame varies by state. As a result, according to FSA officials, of the farming operations selected for review each year, more than half are waived and therefore not actually reviewed. Many of the waived cases show up year after year because FSA's sampling methodology does not take into consideration when an operation was last reviewed. In 2001, the latest year for which data are available, only 523 of 1,573 sampled entities were to be reviewed. Field offices sought and received waivers for 966 entities primarily because the entities were previously reviewed or the farming operation involved only a husband and wife. According to FSA headquarters officials, the sampling process was developed in the mid- 1990s and it can be improved and better targeted. Second, field offices do not always conduct compliance reviews in a timely manner. Only 9 of 38 FSA state offices responsible for conducting compliance reviews for 2001 completed the reviews and reported the results to FSA headquarters within 12 months, as FSA policy requires. FSA headquarters selected the 2001 sample on March 27, 2002, and forwarded the selections to its state offices on April 4, 2002. FSA headquarters required the state offices to conduct the compliance reviews and report the results by March 31, 2003. Six of the 26 FSA state offices that failed to report the results to headquarters had not yet begun these reviews for 470 farming operations as of summer 2003: Arkansas, California, Colorado, Louisiana, Ohio, and South Carolina. Until we brought this matter to their attention in July 2003, FSA headquarters staff were unaware that these six states had not conducted compliance reviews for 2001. Similarly, they did not know the status of the remaining 20 states. Because of this long delay, FSA cannot reasonably assess the level of recipients' compliance with the act and may be missing opportunities to recapture payments that were made to ineligible recipients if a farming operation reorganizes or ceases operations. Third, FSA staff do not use all available tools to assess compliance. For one-half of the case files we reviewed for 2001, field offices did not use all available tools to determine whether persons are actively engaged in farming. FSA compliance review policy requires field staff to interview persons asserting that they are actively engaged in farming before making a final eligibility decision, unless the reason for not interviewing the person is obvious and adequately justified in writing. Indeed, 83 percent of the field offices responding to our survey indicated that interviews are helpful in conducting compliance reviews. However, in 27 of the 86 case files we reviewed in six states, field staff did not interview these persons and did not adequately document why they had not done so. In one of the states we visited, field staff had not conducted any interviews. We also found that some field offices do not obtain and review certain key financial information regarding the farming operation before making final eligibility decisions. For example, our review of case files indicated that for one-half of the farming operations, field staff did not use financial records, such as bank statements, cancelled checks, or accounting records, to substantiate that capital was contributed directly to the farming operation from a fund or account separate and distinct from that of any other individual or entity with an interest in the farming operation, as required by FSA's policy. Instead, FSA staff often rely on their personal knowledge of the individuals associated with the farming operation to determine whether these individuals meet the requirement for active engagement in farming. Fourth, FSA does not consistently collect and analyze monitoring data. FSA has not established a methodology for collecting and summarizing compliance review data so that it can (1) reliably compare farming operations' compliance with the actively engaged in farming requirements from year to year and (2) assess its field offices' conduct of compliance reviews. Under Office of Management and Budget Circular A-123, agencies must develop and implement management controls to reasonably ensure that they obtain, maintain, report, and use reliable and timely information for decision-making. Because FSA has not instituted these controls, it cannot determine whether its staff are consistently applying the payment eligibility requirements across states and over time. Finally, these problems are exacerbated by a lack of periodic training for FSA staff on the payment limitations and eligibility rules. Training has generally not been available since the mid-1990s. In conclusion, the Farm Program Payments Integrity Act of 1987, while enacted to limit payments to individuals and entities actively engaged in farming, allows farming operations to maximize the receipt of federal farm payments as long as all recipients meet eligibility requirements. However, we found cases where payment recipients may have developed methods to circumvent established payment limitations. This seems contrary to the goals of the 1987 Act and was caused by weaknesses in USDA's regulation and oversight. The regulations need to better define what constitutes a significant contribution of active personal management and clarify whether fraudulent intent is necessary to find that someone has adopted a scheme or device. Without specifying measurable standards for what constitutes a significant contribution of active personal management, FSA allows individuals who may have had limited involvement in the farming operation to qualify for payments. Moreover, FSA is not providing adequate oversight of farm program payments under its current regulations and policies. In our report to you, we made eight recommendations to the Secretary of Agriculture for improving FSA's oversight of compliance with the 1987 Act, including: developing measurable requirements defining a significant contribution of active personal management; clarifying regulations and guidance as to what constitutes a scheme or device; improving its sampling method for selecting farming operations for review; and developing controls to ensure all available tools are used to assess compliance with the act. USDA agreed to act on most of our recommendations. However, USDA stated that its current regulations are sufficient for determining active engagement in farming and assessing whether operations are schemes or devices to evade payment limitations. Mr. Chairman, this concludes my prepared statement. We would be happy to respond to any questions that you or other Members of the Committee may have. For further information about this testimony, please contact Lawrence J. Dyckman, Director, Natural Resources and Environment, (202) 512-3841, or by email at [email protected]. Ron Maxon, Thomas Cook, Cleofas Zapata, Carol Herrnstadt Shulman, and Amy Webbink made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Farmers receive about $15 billion annually in federal payments to help produce major crops, such as corn, cotton, rice, and wheat. The Farm Program Payments Integrity Act of 1987 (1987 Act) limits payments to individuals and entities--such as corporations and partnerships--that are "actively engaged in farming." This testimony is based on GAO's report, Farm Program Payments: USDA Needs to Strengthen Regulations and Oversight to Better Ensure Recipients Do Not Circumvent Payment Limitations ( GAO-04-407 , April 30, 2004). Specifically, GAO (1) determined how well USDA's regulations limit payments and (2) assessed USDA's oversight of the 1987 Act. GAO's survey of USDA's field offices showed that for the compliance reviews the offices conducted, about 99 percent of payment recipients asserted they met eligibility requirements through active personal management. However, USDA's regulations to ensure recipients are actively engaged in farming do not provide a measurable standard for what constitutes a significant contribution of active personal management. By not specifying such a measurable standard, USDA allows individuals who may have limited involvement with the farming operation to qualify for payments. Moreover, USDA's regulations lack clarity as to whether certain transactions and farming operation structures that GAO found could be considered schemes or devices to evade, or that have the purpose of evading, payment limitations. Under the 1987 Act, if a person has adopted such a scheme or device, then that person is not eligible to receive payments for the year in which the scheme or device was adopted or the following year. Because it is not clear whether fraudulent intent must be shown to find that a person has adopted a scheme or device, USDA may be reluctant to pursue the question of whether certain farming operations, such as the ones GAO found, are schemes or devices. According to GAO's survey and review of case files, USDA is not effectively overseeing farm payment limitation requirements. That is, USDA does not review a valid sample of farm operation plans to determine compliance and thus does not ensure that only eligible recipients receive payments, and compliance reviews are often completed late. As a result, USDA may be missing opportunities to recoup ineligible payments. For about one-half of the farming operations GAO reviewed for 2001, field offices did not use available tools to determine whether persons were actively engaged in farming.

VA arranges for the delivery of home health care services to veterans through two methods. Under its HBHC programs, teams of VA hospital staff deliver primary care services directly to veterans in their homes. Under VA's second method, community-based providers deliver home health care services to veterans. VA pays for these community-based provider services through its fee-based home health services program unless the veteran is covered by Medicare's home health care benefit. Generally, for these veterans, VA hospital staff facilitate the delivery of these services and Medicare pays for them. Begun in July 1972, VA's HBHC program consists of individual HBHC programs affiliated with hospitals and medical centers around the country. HBHC is an extended care program designed to meet the long-term care needs of veterans who have chronic multiple medical and psychosocial problems, a terminal illness, or a need for post-hospital rehabilitation or monitoring. The objectives of the program are to provide primary care services to homebound patients in their homes; create a therapeutic and safe home environment; support the caregiver--the veteran's spouse, other family member, or friend--in caring for the patient; reduce the need for, and provide an alternative to, hospitalization or other institutionalization; promote timely discharge of patients from hospitals or nursing homes; and provide an academic and clinical setting for students of the health professions. Veterans may or may not be charged a fee for HBHC services, depending upon their eligibility for outpatient services. In fiscal year 1994, VA served 9,953 veterans under this program. VA's fee-based home health services program pays community-based providers to provide home health care services to veterans who received inpatient care for an acute condition at a medical center and have been discharged. It also pays for skilled medical treatment for other veterans entitled to VA medical care. Whether veterans are charged fees for services under this program depends upon their eligibility for outpatient services. In fiscal year 1994, VA served 12,800 patients under this program. In addition to the veterans receiving hospital-based and fee-based care, VA facilities referred at least 19,000 Medicare-eligible veterans to Medicare-certified health care agencies in fiscal year 1994. For hospitals with an HBHC program, the decision about whether a patient receives HBHC or community-based care is made by hospital staff on the basis of such factors as the patient's medical condition and the types of services needed. If HBHC would best meet the patient's needs, staff would try to use that program to provide home health care. If the hospital does not have an HBHC or if staff determine that community-based care would meet the veteran's needs, the next step is determined by the veteran's Medicare eligibility. Generally, if a veteran's care would not be covered by Medicare, VA will pay for a veteran's home health care services under the fee-based program. VA staff facilitate the delivery of home health care to veterans with Medicare coverage by referring them to community-based providers with the understanding that Medicare will pay for their services. However, VA continues to provide all medical care follow-up, drugs, and supplies that are not paid for by Medicare. VA hospitals are not required to have HBHC programs, and most do not. In fiscal year 1995, VA operated 74 HBHC programs: 73 of its 173 hospitals had an HBHC program, and one additional program was operated by an outpatient clinic. A VA hospital can operate an HBHC program if it meets certain criteria and receives VA approval. For example, guidance from VA's Central Office requires hospitals to demonstrate that they discharge a required number of veterans with specified medical conditions and that they have staff to provide services to the veterans once they are discharged. Hospitals may also terminate their HBHC programs in response to other demands on their staff and budget. Between fiscal years 1990 and 1995, the number of programs increased from 72 to 74, with five VA hospitals initiating HBHC programs and three terminating their programs during this time. HBHC patients tend to be chronically ill and in need of long-term care, although some may be terminally ill or need short-term care following hospitalization. In fiscal year 1994, half of the HBHC programs reported to VA that their patients had an average age of 71 years or less. There is no limit on how long veterans may stay in the program. During fiscal year 1994, half the questionnaire respondents that had an HBHC program indicated that their patients stayed in the program an average of 7 months or less. As of March 31, 1995, about 44 percent of the patients had been in the program 1 year or longer. In order to qualify for HBHC services, veterans must be homebound; should have a caregiver--such as a spouse, family member, significant other, or friend--to assist with their care; must live within a defined geographic area--usually a 30-mile radius of the must generally only need services Monday through Friday during normal must be entitled to VA medical care. Under the HBHC program, an interdisciplinary team of VA hospital staff delivers primary care services to veterans in their homes. A typical program consists of several nurses, a social worker, a coordinator, a clerk, and the part-time services of a physician and dietician. Some programs also have a physical therapist, occupational therapist, or home health technician. Skilled nursing is the predominant service of HBHC programs: 99 percent of the HBHC programs report providing this service. Skilled nursing includes such activities as changing dressings, teaching patients how to manage their medical problems, administering medications, and drawing blood samples for laboratory analysis. Nursing services are provided in accordance with the patient's plan of care. HBHC social workers provide psychosocial services, such as counseling and resolution of social and emotional problems that affect treatment or impede medical recovery. Ninety-six percent of the HBHC programs provide these services to veterans in their homes, according to questionnaire respondents from hospitals with HBHC programs. HBHC physicians usually work in the programs on a part-time basis and have primary medical responsibility for all HBHC patients. Their responsibilities include identifying the patients' medical problems, defining the medical management of the problems, and determining whether to admit HBHC patients to the medical center. Approximately 80 percent of the respondents said their HBHC program provides physician services in veterans' homes. Dietician services are another important component of HBHC programs, with almost 9 out of every 10 programs reporting that their dieticians make home visits. HBHC dieticians assess patients' nutritional needs over time in relation to changes in their condition. They also teach patients and their caregivers how to adapt and modify their food preparation practices. Responses to our questionnaire showed that most HBHC programs in fiscal year 1995 did not provide skilled physical, occupational, or speech therapy; home health aide services; or pharmacy services to veterans in their homes. In fiscal year 1994, VA reported expenditures of $36.6 million on this program. Most veterans receive home health care services from community-based providers through either VA's fee-based program or Medicare's home health care benefit. These veterans tend to need short-term home health care associated with an acute medical condition, although some have longer-term needs. Many of the services commonly provided by the fee-based program and Medicare are the same, but more types of services are generally available to veterans covered by Medicare. Nearly all VA hospitals used the fee-based program in fiscal year 1995 to purchase skilled home health care services from community-based providers. Most veterans in this program receive short-term home health care services to address acute medical conditions, such as hip fractures or surgical wounds. Some veterans, however, receive long-term home health care services to address chronic conditions, as in the case of a patient with Parkinson's disease, for example, who has an ongoing need for skilled services, such as intramuscular injections. Half of our questionnaire respondents reported that their fee-based patients in fiscal year 1994 had an average age of 61 years or less. VA will authorize payment to community providers for a maximum of 12 months following a veteran's hospital discharge, and reauthorization can be extended upon the approval of a VA physician. During fiscal year 1994, half of our questionnaire respondents indicated that their fee-based patients had an average length of stay in the program of 90 days or less. To qualify for this program, veterans must be entitled to VA medical care. Veterans are not required, however, as in the HBHC program, to have a caregiver at home, live within a certain distance of the hospital, or generally need services only during certain hours of the work week. Skilled nursing is the predominant service covered by the fee-based program. Nearly all respondents to our questionnaire said that they usually purchase skilled nursing services for veterans. Physical, occupational, and speech therapy services are each purchased for patients in the fee-based program in over half of the medical centers, according to questionnaire respondents. Physical therapists work with patients to improve their capacity to perform simple daily activities, and occupational therapists assess patients' rehabilitation needs, develop plans of care, and provide training. Speech therapists help patients such as stroke victims improve their ability to communicate. The fee-based program also covers the services of physicians and psychologists. However, only about one-fifth or fewer of the respondents said that they usually purchase these services under the fee-based program. Although VA cannot use fee-based program funds for home health aide services, 22 percent of the respondents said they provide this service to veterans in that program. Medical centers can pay for these services through VA's Homemaker/Home Health Aide program. In fiscal year 1994, VA reported payments of $27.3 million on fee-based home health care services. Most respondents to our questionnaire indicated that they refer veterans covered by Medicare's home health care benefit to community-based providers. Most people who receive Medicare home health care benefits do so for services associated with an acute medical condition, often following hospitalization. Since 1989, however, Medicare has been providing more long-term home health care services to chronically disabled elderly beneficiaries. VA officials told us that Medicare-eligible veterans follow the same basic pattern, with most receiving short-term home health care services around an acute medical condition requiring hospitalization. We were unable to determine how long veterans referred by VA hospitals received Medicare-funded home health care. However, in 1992, about three-quarters of the general Medicare population that used the home health care benefit received services for fewer than 120 days; the average duration of services for these beneficiaries was 42 days. To qualify for Medicare home health care coverage, beneficiaries must be eligible for Medicare (almost all elderly and some disabled people), homebound, in need of skilled nursing or therapy services on a part-time or intermittent basis, and under the care of a physician who prepares and periodically reviews their care plan. The VA physician usually fulfills Medicare's physician requirement for veterans discharged from a VA hospital. Unlike the HBHC program, Medicare does not require beneficiaries to have a caregiver at home or live within a certain radius of the hospital that discharged them. Skilled nursing and home health aide services--along with physical therapy, occupational therapy, speech therapy, and medical social services--are the home health care services that VA usually facilitates for veterans covered by Medicare. Approximately 70 percent or more of the respondents to our questionnaire indicated that they facilitate the delivery of these services. Physician, dietician, and pharmacy services are not covered under Medicare's home health care benefit. However, physician services are covered by other parts of the Medicare program; pharmacy and dietician services may be covered by Medicare under some circumstances. Medicare, and not VA, pays for community-based providers to deliver home health care services to veterans covered by Medicare's home health care benefit. VA incurs some administrative costs in referring patients to Medicare, as well as the costs of VA physicians' developing and reviewing plans of care, but VA does not separately identify these costs. Data on the costs of VA's home health care programs are reported differently, both among HBHCs and between HBHCs and fee-based programs. As a result, to the extent that VA administrators make decisions about whether to have an HBHC program on the basis of the relative costs of HBHCs and fee-based programs, they do so on the basis of their perceptions of cost rather than comparable data. HBHC program costs are based on data developed by the hospitals that support the programs. VA Central Office officials told us that hospitals have wide latitude in deciding which costs to charge to their HBHC programs. This results in different cost charges among the 74 HBHC programs. For example, some HBHC programs include costs of librarians or chaplains, while others include costs of anesthesiologists or optometrists. In addition, hospitals commonly charge costs to their HBHC programs for certain administrative support functions, such as costs for a portion of one full-time-equivalent staff person in the Office of the Chief of Staff. One hospital, for example, charged $8,600 for support from the Chief of Staff's Office in fiscal year 1994. However, we found another case in which a hospital charged $80,500 for approximately 2 full-time-equivalent staff from the Chief of Staff's Office. A VA Central Office official agreed that a charge this high was an error. Central Office officials further stated that they discuss questionable charges that appear in VA's cost reports with hospital staff but that it is up to the hospitals to appropriately allocate costs. VA's reported costs of its fee-based program, on the other hand, represent payments made to community-based providers but exclude costs such as program administration and other indirect costs associated with caring for veterans in this program. For example, costs for staff who administer the program are included in the operating costs of the hospitals where the staff work and are not identified as a cost of the fee-based program. In addition, approximately 70 percent of our questionnaire respondents stated that they case-manage fee-based patients, yet costs associated with case management are not included in the fee-based program. Since VA reports the costs of its programs differently, VA hospital officials are left to make decisions on whether or not to have an HBHC program based on their perceptions of the relative cost of HBHC and fee-based programs. These perceptions vary widely. For example, about 3 years ago, the Tampa HBHC program began treating patients who previously would have received fee-based care. One reason for doing so was to reduce the costly fee-based payments for nursing services. The Kansas City Missouri hospital, on the other hand, terminated its HBHC program in 1994 and referred some of its HBHC patients to community-based providers. A former HBHC official told us that hospital administrators believed that it was less costly to pay for community-based services than for an HBHC program. Respondents to our questionnaire also expressed very different views regarding costs and why they either have or do not have an HBHC program. Over three-fourths of the questionnaire respondents with an HBHC program stated that one reason their medical center has an HBHC program is that it is less costly than purchasing fee-based services. Conversely, approximately half of the respondents without an HBHC program said that one reason they do not have an HBHC program is that it would be more costly than community-based care purchased under the fee-based program. Respondents to our questionnaire also expressed very different views on whether HBHC was more cost effective as compared with community-based care. In this instance, cost-effectiveness refers not only to the actual costs incurred in treating a veteran but also to the effectiveness of the care. For example, who has fewer hospital admissions and shorter hospital stays: HBHC patients receiving primary care services or patients receiving skilled services from community-based providers? About 40 percent of our respondents said they had no basis to judge whether HBHC was more or less cost effective than community-based care. The remaining respondents were evenly divided on which method of providing home health care to veterans was the more cost effective. VA monitors the quality of care provided by its home health care programs, but it is more directly involved in monitoring the care its own employees provide, through HBHC, than the care delivered by community-based providers. Licensing and certification assessments of community-based providers conducted by independent organizations provide VA some assurance that veterans in the fee-based program and those covered by Medicare's home health care benefit receive care from qualified home health care providers. HBHC programs are assessed by outside organizations as well, but in addition, they use case management and quality indicators to evaluate the care they deliver. Medical centers are less likely to use these additional means to monitor the quality of care delivered by community-based providers. Medicare has the primary responsibility for ensuring that quality care is furnished under its home health care benefit. Medicare requires community-based providers to have internal quality assurance programs. Moreover, Medicare requires VA physicians referring patients to prepare and review plans of care. All HBHC programs are accredited by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) and are subject to a performance review every 3 years. JCAHO staff apply standards contained in their Accreditation Manual for Home Care to evaluate how well the home health care provider assessed the patient's service needs, planned for the patient's care, and monitored the patient's response to the care provided. Before 1995, JCAHO's reviews did not measure actual outcomes of care but instead focused on processes and the capacity of a provider to deliver quality care. JCAHO's 1995 standards, however, place more emphasis on outcomes of care. Community-based home health care providers that are certified to treat Medicare beneficiaries are assessed at least once every 15 months by a state survey agency (usually a component of the state health department), by JCAHO, or by the National League for Nursing's Community Health Accreditation Program (CHAP). These surveys are intended to ensure that Medicare beneficiaries receive care from qualified home health care providers. State survey agencies, under contract with the Health Care Financing Administration (HCFA), which administers Medicare, survey community-based providers to determine if they meet Medicare's conditions of participation. These conditions cover such topics as acceptance of patients, medical supervision, and skilled nursing services. Survey staff visit home health care providers and examine organizational, functional, personnel, and patient records and visit with patients in their homes to evaluate the quality and scope of services provided. Home health care providers that meet JCAHO's or CHAP's standards are also deemed to have met Medicare's conditions of participation. Thus, veterans in HBHC programs and those receiving home health care services covered by Medicare are assured of receiving care from Medicare-certified providers. Most, but not all, fee-based patients also receive care from Medicare-certified providers. About 83 percent of the respondents to our questionnaire said they purchase care from Medicare-certified providers most, almost all, or all of the time for their fee-based patients. For example, the three hospitals we visited use only Medicare-certified home health care providers. These hospitals select the providers on the basis of factors such as which providers serve the area where the veteran needing home health care lives, whether the provider is Medicare-certified, and whether the hospital's past experience with the provider has been positive. However, fee-based patients who are paralyzed do not always receive care from Medicare-certified providers because the fee-based program allows family members who have been trained and certified by VA to deliver bowel and bladder care to quadriplegic veterans. Also, a VA Central Office official told us that there are not enough Medicare-certified providers in some areas of the country. VA's programs also employ case management to ensure quality care. Case management, in general, involves coordinating the services needed by and provided to a patient. Case management may address only a veteran's health needs or the total needs of a veteran and his or her family. Similarly, case management may be limited to the process of arranging initial services or may be an ongoing process for the duration of an illness. Not everyone discharged to home health care from a hospital needs case management; some veterans and their families may act as their own case managers. When case management is appropriate, it is seen as important to the adequacy of the home health care veterans receive: 68 percent of the questionnaire respondents said that case management greatly improves the adequacy of care patients receive. The way in which a veteran's care is managed by VA may differ somewhat depending upon the program that is providing for the veteran's services. Nearly all (96 percent) of the respondents with HBHC programs said that they typically case manage patients and that nurses are usually the primary case managers. For veterans receiving fee-based services, most respondents (73 percent) said the VA physician who orders the home health care reviews the provider's periodic reports on the patient's health status most, almost all, or all of the time, and 62 percent said someone (most often a nurse) serves as a case manager for patients. For veterans receiving care paid for by Medicare, about the same number of respondents (72 percent) said the VA physician who orders the home health care reviews the provider's periodic reports most, almost all, or all of the time, but fewer (49 percent) said that someone (usually a nurse) case manages the patient's care. Respondents also described different primary functions of case managers in the different programs, as shown in table 1. Nearly all respondents with an HBHC program said that their case managers performed the primary functions listed in the table, while respondents without an HBHC program indicated that their case managers were much less likely to perform these functions. The greatest difference among respondents was that evaluating the patient's home environment was much less likely to be a primary function of the community-based program case manager than it was to be a function of the HBHC case manager. The HBHC and community-based programs we visited replicated the difference in primary case management functions described in the questionnaires. Case management at the Boston and Tampa HBHC programs involves each of the six functions cited in table 1. For example, each program holds team meetings at least weekly to discuss veterans' status and needs. The Boston, Tampa, and West Roxbury hospitals also case manage patients in their community-based programs, but the management is not as extensive as that conducted by HBHC programs. For example, case management at West Roxbury is limited to defining a plan of care and arranging for the veteran to receive it. At the Tampa hospital, case managers participate with community provider staff in assessing the care needs of patients, coordinate development of patient care plans, and periodically review patients' medical conditions with community provider staff. However, case managers at Tampa do not have the primary functions of directly monitoring and managing the overall delivery of home health care services provided patients under the fee-based or Medicare programs or, for those patients covered by Medicare, directly evaluating the patient's home environment and ability of the caregiver to meet the care needs of patients. Our discussions with medical center staff in the three locations we visited suggest some additional reasons why the primary functions of case management in the community-based programs may differ from those in HBHC. First, case managers for veterans receiving community-based care may also be responsible for a variety of other functions, leaving less time to devote to case management. For example, a Tampa medical center nurse who manages veterans' cases in the fee-based and Medicare programs told us that she coordinates services for two other sets of veterans as well: those that need hospice services and those that are in contract nursing homes. None of the HBHC case managers we spoke to told us that they had similar responsibilities for veterans outside of the HBHC program. Second, medical center case managers may be responsible for arranging home health care services for a large number of veterans as compared with the number of veterans managed by HBHC case managers, which would also leave them less time to devote to case management functions. The two nurse case managers at the Boston medical center, for example, referred 1,074 veterans to community providers in fiscal year 1994. In contrast, Boston's three HBHC case managers were responsible for case managing and providing care to 112 veterans that same year. Another way VA assesses veterans' care is by monitoring performance indicators that VA believes are related to the quality of care provided. For example, if a provider frequently used by a VA hospital has high rates of patient deaths or patients' being readmitted to the hospital, visiting an emergency room, falling, having impaired skin integrity, or getting an infection, this may reflect a problem with the care being provided. Patient satisfaction is also useful as a way of assessing the quality of care. For example, one HBHC program we visited set a standard that at least 90 percent of its veterans would be satisfied with their care, as measured by a patient satisfaction survey. In the fourth quarter of fiscal year 1994, 99.5 percent of the veterans surveyed said that they were satisfied with their care. Indicators such as these are useful to assess performance, identify problems, develop corrective actions, and monitor the effectiveness of the changes made. As table 2 shows, more medical centers track selected quality indicators for their HBHC programs than for their community-based programs. We did not ask how often the community-based providers themselves track these indicators for their patients. Although VA hospitals less often track these quality indicators for community-based providers and patients receiving their care from those providers, they do take other steps to ensure that veterans in community-based programs receive quality care. Eighty percent of questionnaire respondents stated that they have periodic telephone or personal contacts with provider staff most, almost all, or all of the time to discuss the health status of veterans in the fee-based program, and 65 percent said that they have similar contacts for veterans that are covered by Medicare's home health care benefit. About 80 percent said that they require providers to submit periodic written reports regarding the health status of veterans in the fee-based program most, almost all, or all of the time, and about 70 percent said they ask for similar reports for those veterans in the Medicare program. Further, VA officials told us that hospitals evaluate patients' medical conditions when they have an inpatient or outpatient visit at the hospital. Because VA's home health care programs provide different arrays of services to veterans who generally have different home health care needs and because consistent program cost data are not available, it is difficult to compare the relative costs of VA's methods of meeting veterans' home health care needs. And although VA itself more directly monitors care provided under its HBHC program, the quality of care furnished by community-based providers paid for by both VA and Medicare is evaluated in other ways--including by HCFA as part of its responsibility for administering the Medicare program. We obtained comments on a draft of this report from VA officials, including the Deputy Under Secretary for Health. The officials noted that the lack of consistent cost data, in this case for the various types of home health care provided, is a problem not unique to VA and is a challenge for all health care providers. They said that VA, in making improvements to its financial management and information systems, is attempting to better identify costs associated with all of its programs, including each component of its home health care programs. The officials also told us that VA is developing performance measures that will allow managers at multiple levels to understand and identify desired program outcomes. Once these outcomes are in place, managers will be accountable for meeting them in the most cost-effective and efficient manner. VA officials also said that they intend to do cost-benefit analyses for home health care and other programs, once enough data are available. The VA officials additionally suggested some technical changes, primarily for clarification, which we incorporated as appropriate. As arranged with your staff, unless you announce its contents earlier, we plan no further distribution of this report for 7 days after its issue date. At that time, we will send copies to the Secretary of Veterans Affairs, the Senate and House Committees on Appropriations, and other interested parties. We will also make copies available to others upon request. This report was prepared under the direction of James Carlan, Assistant Director, Health Care Delivery and Quality Issues. If you or your staff have any questions concerning this report, please contact Robert Dee, the evaluator-in-charge, at (617) 565-7470. Other staff contributing to this report were Sally Coburn, Patricia Jones, Clarita Mrena, Joan Vogel, and Leonard Hamilton. To develop our description of the ways VA provides home health care, we obtained both nationally descriptive data and additional data at three locations. Collecting these data required audit work at VA's Central Office as well as at the Boston, Massachusetts, and Tampa, Florida, medical centers and at the West Roxbury division of the Brockton Medical Center in Massachusetts. In addition, we reviewed VA's policies and procedures for operating its HBHC and fee-based programs as well as Medicare's regulations concerning its home health care benefit. We also obtained various VA reports detailing operations of its HBHC and fee-based programs. We selected the three hospitals we visited to give us examples of hospitals that have an HBHC program (the medical centers in Boston, Massachusetts, and Tampa, Florida) and one that does not (West Roxbury, a division of the Brockton Medical Center). At these locations, we interviewed staff and obtained documents about their programs. Additionally, we visited 30 veterans in their homes to understand better how their home health care services were provided; 12 were receiving HBHC services, while 18 were receiving community-based services. Of the 12 veterans receiving HBHC services, 6 were cared for by the Boston HBHC program and 6 by Tampa's program. Of the 18 veterans receiving community-based care, we visited 6 discharged by each of the three VA hospitals. Seventeen of the 18 veterans were covered by Medicare's home health care benefit, and 1 was covered by VA's fee-based program. During our visits, a registered nurse on our staff interviewed veterans and discussed their care and activities, observed their medical conditions, and reviewed information from their medical files. We then discussed our observations with appropriate officials at the three medical centers. To obtain nationally representative data about the three home health care programs, we sent a detailed questionnaire to 158 VA medical center directors and 7 other VA health care facilities. We asked respondents to answer questions about their HBHC program, if they had one, and about their community-based program for health care. The questions covered general descriptive information, program staffing, patient admissions and discharges, program services, case management, quality assurance measures, reasons why they did or did not have an HBHC program, and other issues. We pretested the questionnaire at three medical centers, obtained comments from VA officials, and revised it accordingly. A total of 151 medical centers and 6 other VA health care facilities responded to the questionnaire. We were unable to verify independently most of the information provided through the questionnaire. However, questionnaire responses from programs at the three hospitals we visited were consistent with the information we obtained at those locations. In addition, questionnaire responses were consistent with selected aggregate information provided by the VA Central Office. Chicago (Lake Side), IL Chicago (West Side), IL (continued) Salt Lake City, UT West Los Angeles, CA (continued) White River Junction, VT The medical center did not respond to our questionnaire. Information was not provided on the questionnaire received from the medical center. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO provided information on how the Department of Veterans Affairs (VA) meets veterans' home health care needs, focusing on: (1) the characteristics and services of the home health care programs VA uses; (2) the available data describing program costs; and (3) how VA ensures that veterans receive quality home care services. GAO found that: (1) most veterans receive home health care services from community-based providers through either the VA fee-based program or Medicare's home health care benefit; (2) most veterans in these programs receive short-term home health care services for acute medical conditions, while some veterans receive long-term care for chronic conditions; (3) VA provides in-home physician, nursing, social work, and dietician services to veterans with chronic conditions through its Hospital-Based Home Care (HBHC) program; (4) VA makes decisions about using HBHC programs based on its perception of relative costs, since comparable cost data are not available; (5) HBHC program costs are based on data developed by hospitals that support the programs, while VA reported fee-based program costs represent payments made to providers and exclude certain administrative costs; (6) VA monitors the quality of care provided by HBHC programs more directly than it does community-based care; and (7) licensing and certification assessments of community-based providers provide VA assurance that care is provided by qualified sources, but VA is ultimately responsible for ensuring the quality of care in its programs.

Every time responsibility for cargo changes hands along the global supply chain there is the potential for a security breach. As a result, vulnerabilities exist that terrorists could take advantage of by, for example, placing a WMD into a container bound for the United States. While there have been no known incidents of containers being used to transport WMD, criminals have exploited containers for other illegal purposes, such as smuggling weapons, people, and illicit substances. To address the potential security risks posed by the millions of containers that arrive in the United States each year, CBP has implemented a layered security strategy of related initiatives and programs that focus CBP's limited resources on potentially high-risk cargo bound for the United States while allowing other cargo to proceed without unduly disrupting commerce. Key elements of CBP's maritime cargo security initiatives and programs are described below. Automated Targeting System. Information on shipments destined for the United States is automatically fed into CBP's Automated Targeting System (ATS)--an enforcement and decision support system that compares cargo information against intelligence and other law enforcement data. ATS consolidates data from various sources to create a single, comprehensive record for each U.S.-bound shipment. ATS uses a set of rules that assess different factors in the information to determine the risk level of a shipment. One set of rules within ATS, referred to collectively as the maritime national security weight set, is programmed to check for information or patterns that could be indicative of suspicious or terrorist activity. ATS uses this weight set to assess and generate risk scores for every cargo shipment as the shipment moves throughout the global supply chain and new information is provided or existing information is revised. CBP classifies the risk scores from the maritime national security weight set as low, medium, or high risk. ATS automatically places high-risk shipments on hold, and CBP officials use information in ATS to identify (target) which high-risk shipments should be examined or waived. To assist in its targeting efforts, CBP uses key information about shipments destined for the United States obtained through the 24-hour rule and the 10+2 rule. Through the 24-hour rule, CBP generally requires vessel carriers to electronically transmit cargo manifests to CBP 24 hours before cargo is loaded onto U.S.-bound vessels at foreign ports. Through the Importer Security Filing and Additional Carrier Requirements (known as the 10+2 rule), CBP requires importers and vessel carriers to provide data elements for improved identification of cargo shipments that may pose a risk for terrorism. Importers are responsible for supplying CBP with 10 shipping data elements--such as country of origin--24 hours prior to loading, while vessel carriers are required to provide 2 data elements--container status messages and stow plans--that are not required by the 24-hour rule. Container Security Initiative. CSI is a bilateral government partnership program operated by CBP that aims to identify and examine U.S.-bound cargo container shipments that are at risk of containing WMD or other terrorist contraband. As part of the program, CBP officers are stationed at select foreign seaports and review information about U.S.-bound containerized cargo shipments. CBP uses ATS to target U.S.-bound container shipments and request examinations of high-risk container shipments before they are loaded onto vessels. CSI is operational at ports in North America, Europe, Asia, Africa, the Middle East, and Latin and Central America. CBP estimates that, through the CSI program, it prescreens over 80 percent of all maritime containerized cargo imported into the United States. Secure Freight Initiative. In response to a requirement in the SAFE Port Act to scan 100 percent of U.S.-bound cargo containers, CBP established SFI. CBP uses radiation detection and non-intrusive inspection equipment to scan cargo containers before they are loaded onto vessels at select foreign seaports Radiation detection equipment, such as radiation portal monitors (RPM) and radiation isotope identification devices (RIID) detect the presence of radioactive material that may be in a container. RIIDs and certain types of RPMs can identify the specific radioactive isotope being emitted and whether the radiation is a threat or is naturally occurring, such as that found in certain ceramic tiles. The second type of equipment, referred to as non-intrusive inspection equipment, uses X-rays or gamma rays to scan a container and produce images of a container's contents without having to open it. Customs-Trade Partnership Against Terrorism. C-TPAT is a voluntary, public-private sector partnership with private stakeholders in the international trade community that aims to secure the flow of maritime cargo bound for the United States. Through C-TPAT, CBP officials work with member private companies to review the security of their supply chains to ensure their security practices meet CBP's minimum security criteria. In return, C-TPAT members receive various benefits, such as reduced scrutiny of their shipments. Figure 1 provides an overview of the global supply chain and the steps in the supply chain where CBP's key initiatives and programs come into play. Our prior work has shown that CBP has made substantial progress in implementing various initiatives and programs that, collectively, have enhanced cargo security, but some challenges remain. Examples of progress and challenges in the areas of (1) using information for improving targeting and risk assessment of cargo shipments, (2) partnerships with foreign governments, and (3) partnerships with the trade industry are discussed below. In January 2015, we found, among other things, that CBP did not have accurate data on the number and disposition of each high-risk maritime cargo shipment scheduled to arrive in the United States. On the basis of our analyses of CBP data for fiscal years 2009 through 2013, we found that, on average each year, approximately 11.6 million maritime cargo container shipments arrived in the United States, and less than 1 percent of those shipments were determined by ATS to be high-risk. We found that CBP examined the vast majority of high-risk shipments, but CBP's data on the disposition of high-risk shipments were not accurate because of various factors, such as the inclusion of shipments that were never sent to the United States. Further, our analyses found that CBP's data overstated the number of high-risk shipments, including those that appeared not to be resolved (examined or waived) in accordance with CBP policy. We also found that when determining the disposition of high- risk shipments, CBP officers were inconsistently applying criteria to make some waiver decisions and were also incorrectly documenting the reasons for waivers. As a result, we concluded that CBP could not accurately determine the extent to which waivers were used consistently and judiciously across CBP targeting units, as required by policy. We recommended, among other things, that CBP define waiver categories and disseminate policy on issuing waivers for high-risk shipments. DHS concurred with our recommendations and, in December 2015, CBP issued a new policy, National Security Cargo Targeting Procedures, that includes criteria for waiving mandatory examinations of high-risk shipments (referred to as exceptions). The new policy also specifically identifies certain types of shipments that do not qualify for exceptions to examination requirements. In addition, CBP developed a new process for recording waivers and issued a memorandum to targeting units on how to apply the new procedures. CBP's actions help ensure that all of its targeting units are correctly and consistently applying and documenting waivers. In October 2012, we found that more regular assessments of ATS were needed to enhance CBP's targeting of maritime cargo and better position CBP to provide reasonable assurance of the effectiveness of ATS. We, therefore, recommended that CBP (1) ensure that future updates to the rules that identify risks are based on results of assessments that demonstrate the effectiveness of such updates; and (2) establish targets for CBP's performance measures and use those measures to assess the effectiveness of ATS on a regular basis to better determine when updates to the rules that identify risks are needed. DHS concurred with the recommendations and, in May 2015, CBP revised its National Security Weight Set, Maritime Standard Operating Procedures (SOP) to address the new requirements for the maintenance, review, and update of the national security weight set in ATS. The SOP requires program managers to compare proposed versions of the national security weight set against the existing version as part of the process for determining whether to implement a proposed new version of the weight set. Doing so will help provide reasonable assurance that changes to the weight set will improve the effectiveness of CBP's targeting of maritime cargo container shipments. The SOP also establishes a performance measure and an associated target that will assist CBP in determining whether the weight set is effectively targeting maritime cargo container shipments. The SOP requires CBP to review the national security weight set for revisions if the weight set does not meet the performance target in two consecutive quarters. By assessing the weight set regularly against a performance target, CBP will be better positioned to determine when updates to the weight set are needed to ensure continued effectiveness in targeting of high-risk maritime cargo container shipments. In September 2010, we reviewed CBP's efforts to collect additional data through the 10+2 rule and utilize these data to identify high-risk shipments. We found that the 10+2 rule data elements were available for identifying high-risk cargo, but CBP had not yet finalized its national security targeting criteria to include these additional data elements to support high-risk targeting. We recommended that CBP establish milestones and time frames for updating the targeting criteria. In December 2010, CBP provided us with a project plan for integrating the data into its criteria, and in January 2011, CBP implemented the updates to address risk factors present in the 10+2 data. We are currently reviewing CBP's implementation and enforcement of the 10+2 program and anticipate issuing our report in spring 2017. In September 2013, we reported on CBP's progress in implementing CSI. Specifically, we found that CBP had not regularly assessed foreign ports for risks to cargo under the CSI program since 2005. While CBP took steps to rank ports for risks in 2009, we found that CBP did not use results from this assessment to make modifications to the locations where CSI staff are posted because of budget cuts. By applying CBP's risk model to fiscal year 2012 cargo shipment data, we found that CSI did not have a presence at about half of the foreign ports CBP considered high- risk, and about one-fifth of the existing CSI ports were at lower-risk locations. We recommended that DHS periodically assess the supply chain security risks from all foreign ports that ship cargo to the United States and use the results of these risk assessments to inform any future expansion of CSI to additional locations and determine whether changes need to be made to existing CSI ports and make adjustments as appropriate and feasible. DHS concurred with our recommendation and, in response, CBP developed a CSI Port Risk Matrix and Port Priority Map. CBP officials stated that the matrix and map will be used, along with several other tools available to CSI, to assess whether changes need to be made to CSI ports worldwide. According to CBP, these tools are to be updated yearly and, if necessary, can be updated more frequently based on significant changes, emerging threats, and intelligence. As a result of developing and employing these new risk-assessment tools, CBP should be better positioned to ensure that it is allocating its resources to provide the greatest possible coverage of high-risk cargo to best mitigate the risk of importing WMD or other terrorist contraband into the United States through the supply chain. In October 2009, we reported that scanning operations at the initial SFI ports encountered a number of challenges--including safety concerns, logistical problems with containers transferred from rail or other vessels, scanning equipment breakdowns, and poor-quality scan images. Both CBP and GAO had previously identified many of these challenges, and CBP officials were concerned that they and the participating ports could not overcome them. Senior DHS and CBP officials acknowledged that most, if not all foreign ports, would not be able to meet the July 2012 target date for scanning all U.S.-bound cargo, and DHS would need to issue extensions to such ports to allow the continued flow of commerce in order to remain in compliance with relevant statutory requirements. We recommended that DHS, in consultation with the Secretaries of Energy and State, develop, among other things, more comprehensive cost estimates, conduct cost-benefit and feasibility analyses, and provide the results to Congress. In response to our recommendations, CBP stated it had no plans to develop comprehensive cost estimates or feasibility analyses since SFI is operating at one port and it had no funds to conduct such analyses. In July 2013, we closed these recommendations as not implemented. In May of 2012, 2014, and 2016, the Secretary of Homeland Security authorized a 2-year extension of the deadline for implementing the 100 percent scanning requirement for U.S. bound cargo before it is loaded onto vessels at foreign seaports. In May 2014, the Secretary of Homeland Security renewed the extension (until July 2016) and stated that "DHS's ability to fully comply with this unfunded mandate of 100 percent scanning, even in long term, is highly improbable, hugely expensive, and in our judgment, not the best use of taxpayer resources to meet this country's port security and homeland security needs." The Secretary also stated that he instructed DHS, including CBP, to do a better job of meeting the underlying objectives of the mandate. In the most recent letter, dated May 2016, authorizing the extension until July 2018, the Secretary stated he has committed the Department to work towards meeting the mandated 100 percent scanning requirement. The Secretary also outlined steps DHS is taking to engage stakeholders to identify solutions by leveraging the private sector. DHS plans to assess the feedback it receives during the summer of 2016 and will subsequently seek to test viable solutions in operational environments. In April 2008, we reported, among other things, that CBP took steps to improve the process for validating C-TPAT applicants' security practices and implemented numerous actions to address C-TPAT management and staffing challenges. However, we found challenges with the technology CBP used to help ensure that validation information is consistently collected, documented, and uniformly applied to decisions regarding the awarding of benefits to C-TPAT members, and that CBP lacked a systematic process to ensure that members take appropriate actions in response to security validation findings. We also found that C- TPAT's performance measures were insufficient to assess the impact of C-TPAT on increasing supply chain security. We made recommendations to CBP to strengthen C-TPAT program management and oversight. Specifically, we recommended, among other things, that CBP document key data elements needed to track compliance with the SAFE Port Act and other CBP internal requirements and to identify and pursue opportunities in information collected during C-TPAT member processing activities that may provide direction for developing performance measures of enhanced supply chain security. CBP has since implemented these recommendations by, for example, creating an automated platform to track and capture the content and communication between CBP and C- TPAT members to ensure that C-TPAT validation report recommendations are implemented and identifying analytical tools and data for trend analysis to better assess C-TPAT's impact on the supply chain. We are currently reviewing the C-TPAT program, specifically how CBP assesses member benefits and conducts security validation responsibilities. We anticipate issuing our report in late fall 2016. Thank you Chairman Hunter, Chairwoman McSally, Ranking Members Garamendi and Vela, and Members of the Subcommittees. This completes my prepared statement. I would be happy to respond to any questions you may have at this time. For questions about this statement, please contact Jennifer Grover at (202) 512-7141 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Christopher Conrad (Assistant Director), Carla Brown, Lisa Canini, Michele Fejfar, Eric Hauswirth, Heidi Nielson, Ashley Rawson, and Natarajan Subramanian. Key contributors for the previous work that this testimony is based on are listed in those products. This appendix describes the key initiatives and programs related to U.S. Customs and Border Protection's (CBP) strategy for ensuring the security of maritime cargo. CBP has developed this strategy to mitigate the risk of weapons of mass destruction, terrorist-related material, or other contraband from being smuggled into the United States. CBP's strategy is based on related initiatives and programs that attempt to focus resources on high-risk shipments while allowing other cargo shipments to proceed without unduly disrupting the flow of commerce into the United States. The strategy includes obtaining cargo information on shipments in advance of their arrival at U.S. ports to identify high-risk shipments, using technology to inspect cargo, and partnering with foreign governments and members of the trade industry. Table 1 provides a brief description of some of the key initiatives and programs that compose this security strategy.

The U.S. economy is dependent on the expeditious flow of millions of tons of cargo each day through the global supply chain--the flow of goods from manufacturers to retailers. Criminal or terrorist attacks using cargo shipments can cause disruptions to the supply chain and can limit global economic growth and productivity. Within DHS, CBP has responsibility for administering maritime cargo security measures and reducing the vulnerabilities associated with the supply chain. CBP has developed a layered security strategy that focuses its limited resources on targeting and examining high-risk cargo shipments that could pose a risk while allowing other cargo shipments to proceed without unduly disrupting commerce arriving in the United States. This statement discusses the progress and challenges associated with CBP's implementation of initiatives and programs responsible for enhancing the security of the global supply chain. The statement is based on reports and testimonies GAO issued from April 2008 through January 2015 related to maritime cargo security--with selected updates on how DHS has responded to GAO's prior recommendations. The Department of Homeland Security (DHS) and U.S. Customs and Border Protection (CBP) have made substantial progress in implementing initiatives and programs that, collectively, have enhanced cargo security, but some challenges remain. Examples of progress and challenges are discussed below. Risk Assessments of Cargo Shipments . In January 2015, GAO found that CBP did not have accurate data on the number and disposition of each high-risk shipment scheduled to arrive in the United States. Specifically, CBP's data overstated the number of high-risk shipments, including those that appeared not to be examined or waived in accordance with CBP policy. CBP officers inconsistently applied criteria to make some waiver decisions and incorrectly documented waiver reasons. GAO recommended that CBP define waiver categories and disseminate policy on issuing waivers. In response, CBP issued a new policy that includes criteria for waiving examinations of high-risk shipments and developed a new process for recording waivers and issued a memorandum. Partnerships with Foreign Governments. In September 2013, GAO reported that CBP had not regularly assessed foreign ports for risks to cargo since 2005. GAO recommended that DHS periodically assess the security risks from ports that ship cargo to the United States and use the results to inform whether changes need to be made to Container Security Initiative (CSI) ports. DHS concurred with the recommendation and CBP has since developed a port risk matrix and priority map to be used to help assess whether changes need to be made to CSI ports. These tools are to be updated yearly and can be updated more frequently based on significant changes, emerging threats, and intelligence. These tools should assist CBP in ensuring it is allocating its resources to provide the greatest coverage of U.S.-bound high-risk cargo. In October 2009, GAO reported challenges to scanning 100 percent of U.S.- bound cargo at foreign ports. DHS officials acknowledged that most, if not all foreign ports, would not be able to meet the July 2012 target date for scanning all U.S.-bound cargo, and DHS would need to issue extensions to allow the continued flow of commerce and remain in compliance with statutory requirements. Although the Secretary of Homeland Security has issued three 2-year extensions for implementing the 100 percent scanning mandate, which have extended the deadline to July 2018, DHS has not yet identified a viable solution to meet the requirement. Partnerships with the Trade Industry. Through the Customs-Trade Partnership Against Terrorism (C-TPAT) program, CBP officials work with member companies to validate the security of their supply chains in exchange for benefits, such as reduced scrutiny of their shipments. In April 2008, GAO found, among other things, that CBP lacked a systematic process to ensure that members take appropriate actions in response to security validations. GAO recommended that CBP document key data elements needed to track compliance. CBP has since implemented a process to ensure that C-TPAT validation report recommendations are implemented. GAO is currently reviewing the C-TPAT program, to include an assessment of CBP's ability to meet its security validation responsibilities. In prior reports, GAO has made recommendations to DHS to strengthen various maritime cargo security programs. DHS generally concurred with the recommendations and has taken actions, or has actions under way, to address many of these recommendations.

The DI program provides monthly cash benefits to insured, severely disabled workers; the SSI program provides monthly cash payments to aged, blind, or disabled people whose income and resources fall below a certain threshold. Claimants under either program file an application for disability benefits with one of SSA's more than 1,300 field offices. Applications, along with supporting medical evidence, are then forwarded to state disability determination service (DDS) offices, which make the initial medical determination of eligibility in accordance with SSA's policies and procedures. Claimants DDS examiners find ineligible have the right to appeal the decision to OHA, where cases are heard by administrative law judges (ALJ). A steadily increasing number of appeals has caused workload pressures and processing delays for OHA. Between 1985 and 1995, appeals increased more than 140 percent, and the number of appealed cases awaiting an OHA decision grew from about 107,000 to almost 548,000. During this period, average processing time for cases appealed to OHA--measured from the date a claimant files a request for a hearing to when a decision is issued-- increased 110 percent, from 167 days to 350 days. In addition, "aged" appealed cases (those taking 270 days or more for a decision) increased from 5 percent of pending appealed cases to 39 percent during the same period. SSA has a long-term strategy--its Plan for a New Disability Claim Process--designed to address systemic problems contributing to inefficiencies in its disability programs and significantly reduce the time claimants must wait to receive a decision on their claim. STDP is SSA's ongoing effort to achieve some reduction in OHA's backlog of appealed cases. SSA began STDP in November 1994 to address the backlog crisis from an agencywide perspective and establish specific goals and time frames for reducing backlogs. STDP includes 19 temporary initiatives to expedite the disability determination process and reduce OHA's backlog from 488,000 appealed cases in October 1994 to 375,000 by December 1996. SSA set its backlog target to equal one and one-half times the number of appealed cases that, in OHA's opinion, constitutes an appropriate workload for its ALJs and staff--about 250,000 appealed cases. According to OHA, the 375,000 target does not relate to any processing time or waiting time goal-- it simply is a target that SSA believed was achievable at STDP's inception. To reach its aggressive backlog reduction goal, STDP relies heavily on a temporary reallocation of agency resources and process changes to reduce the number of appealed cases requiring an ALJ hearing. Although STDP has 19 temporary initiatives, OHA expects that its major effect will come primarily from expanding two pre-STDP initiatives to expedite the processing of appealed cases. These two initiatives--regional screening unit and prehearing conferencing activities--were designed to target for review specific kinds of appealed cases that are likely to result in ALJs' approving the claim for payment (referred to as "allowance"). These reviews can result in possible allowance without the more costly and time-consuming process of an ALJ hearing. Before STDP's implementation, SSA had established screening units in each region to help alleviate OHA's backlog. Screening unit examiners, who were not OHA staff, reviewed certain appealed cases to determine if the evidence in the case file was sufficient to permit an allowance, eliminating the need for a hearing. SSA selected most cases for review by screening unit staff by using computer-generated case profiles to identify potentially incorrect claim denials by DDS staff. SSA officials believe that such profiling of appealed cases minimizes the risk of incorrect allowances. Under STDP, SSA expanded screening unit activities by assigning OHA attorneys to help examiners in all of SSA's regional screening units to identify more appealed cases that could be allowed earlier in the process. According to SSA, the opportunity for screening unit examiners to discuss issues with OHA attorneys gave the examiners more insight into the adjudication process and enabled the examiners and attorneys, where appropriate, to recommend allowance in more cases. SSA's pre-STDP efforts to reduce the backlog of appealed cases also included implementing a prehearing conferencing process. The purpose of prehearing conferencing was to shorten processing time for appealed cases by assigning experienced OHA attorneys to review and identify appealed cases that potentially could be allowed without a formal ALJ hearing. While screening unit activities focused on reviewing evidence already in the case file, prehearing conferencing enabled attorneys to review evidence in the case file, confer with claimant representatives, conduct limited case development, and draft decisions to be reviewed and approved by ALJs. Under STDP's expanded prehearing conferencing initiative, OHA's senior attorneys have been given quasi-judicial powers or the authority to issue allowance decisions without an ALJ's involvement or approval. Under the initiative, OHA attorneys are to extensively develop the case record, which includes obtaining medical and vocational evidence, conducting conferences with claimant representatives as well as medical and vocational experts, and issuing allowance decisions. If they cannot allow the claim on the basis of their review of the evidence, the case is scheduled for an ALJ hearing. As in the screening unit initiative, SSA relied on computer-generated case profiles to select cases to be processed under this effort. Cases were selected on the basis of their likelihood to be allowed on the record by an ALJ. STDP is scheduled to be phased out in December 1996. Although OHA has proposed that SSA extend expanded screening unit activities through December 1997, as of September 1996 SSA had made no final decision on this. Expanded prehearing conferencing, however, will remain active until June 30, 1997, when regulatory authority for senior attorneys to allow appealed cases expires. In fiscal year 1997, SSA expects to implement certain features from its ongoing efforts to redesign the disability claims process. One of the features being tested is a new decision-making position to help expedite appealed claims through the process. Like activities under STDP's expanded screening unit and prehearing conferencing initiatives, this position will enable someone other than an ALJ to review and allow some appealed cases, eliminating the need for an ALJ hearing. SSA acknowledges that it will not reach STDP's goal of reducing the backlog of appealed cases to 375,000 by December 1996. In fact, OHA's backlog of about 515,000 appealed cases as of August 1996--about 22 months into STDP--was 3 percent higher than the backlog of about 500,000 that existed at the plan's inception. Although SSA will not reach STDP's backlog reduction goal, the agency believes that the plan has helped to reduce the growth in the backlog of appealed cases awaiting a decision. Since peaking at about 552,000 in December 1995, OHA's backlog decreased steadily by an average of about 4,600 appealed cases per month through August 1996 or by about 37,000 total appealed cases. As shown in figure 1, OHA's backlog decreased during each of the last two fiscal quarters of 1996. As of August 31, 1996, the backlog was 515,009 appealed cases. OHA's current projections indicate that its backlog of appealed cases will be approximately 498,000 at the end of calendar year 1996 or about 123,000 above STDP's target. OHA is relying on increased productivity from its ALJs and attorneys to increase its ability to dispose of cases and facilitate reaching this revised target. According to OHA, its inability to reach STDP's backlog reduction goal is due to start-up delays, overly optimistic projections on the number of appealed cases that could be processed, and an unexpected increase in the number of appealed cases. Figure 2 illustrates the disparity between the number of appealed cases OHA expected to allow under STDP through December 1996 and the actual number that have been allowed through August 1996--22 months since the plan was initiated. Start-up delays associated with prehearing conferencing--the initiative expected to have the greatest impact on reducing OHA's backlog of appealed cases--have hindered SSA's ability to reach STDP's goals. To implement this initiative, SSA had to seek a regulatory change to give about 600 OHA senior and supervisory staff attorneys the authority to decide certain appealed cases that were formerly limited to ALJ jurisdiction. However, the process of obtaining regulatory change and defining the specific duties and responsibilities these attorneys would have under STDP was lengthy, and implementation did not begin until July 1995--or about 6 months after the projected start-up date. Overly optimistic allowance projections for STDP's expanded prehearing conferencing and screening unit initiatives also contributed to OHA's inability to reach the plan's backlog reduction goal. SSA initially projected that expanded prehearing conferencing would result in 224,000 allowances by senior attorneys through the 2-year period ending December 1996. However, as of August 31, 1996--or about 22 months into STDP--these attorneys had allowed only 55,363 appealed cases or about 25 percent of the projected total. The aggressive projections for this initiative were based on the results of the prehearing conferencing pilot, which OHA conducted before STDP's implementation, and the assumption that the use of profiling to select cases would result in a higher rate of cases that could be allowed without a hearing. On the basis of the prehearing conferencing pilot, which was conducted at 19 hearing offices that agreed to participate, OHA estimated that senior attorneys would be able to allow approximately 75 percent of the appealed cases selected for their review. However, data show that between August 1995 and August 1996 senior attorneys allowed only about 24 percent of the appealed cases reviewed under STDP. According to SSA, the lower allowance rate is primarily due to senior attorneys' not conducting prehearing conferences with claimants as frequently as anticipated as well as not sufficiently developing evidence necessary to complete a claimant's case record. To increase the number of allowances under this initiative, OHA has directed its hearing offices to ensure that all senior attorneys receive training to better familiarize themselves with OHA's case development process. In addition, through directives and a series of conference calls with all its hearing offices, OHA has provided its senior attorneys with specific guidance that includes the kind of evidence that would adequately support an allowance decision. Like STDP's prehearing conferencing initiative, expanded regional screening has not reached STDP's allowance goals. Before STDP, screening units were expected to allow about 20,000 appealed cases annually. With STDP's introduction of OHA attorneys to the process, SSA expected to allow 38,000 appealed cases annually or 76,000 over the 2 years the initiative was to be in place. In the 22 months since STDP was initiated, however, screening units had allowed a total of 26,022 appealed cases or about 34 percent of the projected total as of August 31, 1996. SSA expected that under STDP, regional screening units would allow 76,000 appealed cases or about 15 percent of those selected for review. To reach the initiative's target of 76,000 allowances, screening units would have had to review a total of about 507,000 cases. Since STDP's inception in November 1994, however, screening units had reviewed only about 258,000 cases as of August 31, 1996. According to SSA, the shortfall in the number of appealed cases processed by screening units is mainly due to SSA's reassignment of some screening unit staff to other duties. Finally, an unexpected increase in the number of appeals also hindered OHA's efforts to reduce its backlog to STDP's goal. During fiscal year 1995, OHA received approximately 37,500 more appealed cases than it had initially projected for the year. According to OHA's staff management officer, this unanticipated workload was due primarily to an increased number of cases processed by DDS staff. STDP has enhanced OHA's ability to dispose of appealed cases, helped decrease the agency's decision-writing backlog, and reduced processing time for some appealed cases. OHA estimates that as of August 31, 1996, STDP had resulted in a net increase of about 66,500 dispositions. This estimate is based on time savings associated with appealed cases allowed under STDP's expanded screening unit and prehearing conferencing initiatives. To determine the net increase in dispositions attributable to STDP, OHA estimated the amount of ALJ time that could be saved through activities implemented under the plan's two key initiatives and converted these time savings into the number of additional cases that could be disposed of by ALJs in that amount of time. OHA's estimate that the number of dispositions through August 1996 increased by about 66,500 as a result of STDP is consistent with our estimate. On the basis of our analysis of ALJ productivity before STDP, had SSA not implemented the plan, OHA would have disposed of about 68,000 fewer cases between the beginning of fiscal year 1995 and August 1996. STDP has also helped to reduce the number of appealed cases awaiting a written decision. To increase OHA's decision-writing capacity, staff from various SSA offices were temporarily detailed to OHA under STDP. Efforts made under STDP helped reduce the decision-writing backlog from 40,567 decisions--its level at STDP's inception--to 20,293 as of August 31, 1996, or by about 50 percent. Finally, STDP has significantly reduced processing times for appealed cases allowed under its expanded screening unit and prehearing conferencing initiatives. On average, processing times for screening unit examiners' decisions have averaged 39 days; processing times for senior attorneys' prehearing conferencing decisions have averaged 121 days. These processing times are substantially shorter than the average monthly processing time of 264 days for similar cases decided by ALJs from May 1995 through May 1996. Some SSA and OHA officials had expressed concern to us that STDP's aggressive processing goals could result in inappropriate benefit awards for some disability claimants and that STDP's initiatives could cause OHA's allowance rate to increase. However, the percent of appealed cases allowed by OHA since STDP's inception has notably decreased. The allowance rate has decreased from about 75 percent in fiscal year 1994-- the fiscal year preceding STDP's implementation--to about 69 percent through the third quarter of fiscal year 1996. This allowance rate reflects cases decided by ALJs as well as those decided by screening unit staff and senior attorneys under STDP. As figure 3 shows, except for the third quarter of fiscal year 1996, the allowance rate has decreased during every quarter since the beginning of 1995. SSA has not completed any analyses of factors contributing to this decrease, however. STDP is SSA's effort to achieve some reduction in what has been OHA's growing backlog of appealed cases. Recent processing trends show that STDP has helped the agency reduce the backlog, which has decreased steadily in the past 8 months. In addition, concerns that STDP could result in inappropriate allowances and that OHA's allowance rate could increase have not been substantiated. SSA is evaluating the accuracy of the decisions made under STDP to help determine the advisability of continuing with the plan. Because STDP has shown that it can help reduce the backlog of appealed cases, we recommend that--if SSA determines that accurate decisions are being made--the Commissioner of the Social Security Administration extend STDP until the agency institutes a permanent process that ensures the timely and expeditious disposition of appeals. In commenting on a draft of this report, SSA agreed with our conclusions and recommendation on the conditions for extending STDP. The agency stated that it recently found the accuracy of screening unit allowances to be acceptable and has decided to extend the initiative beyond the original December 1996 expiration date. The agency also stated that it is reviewing the accuracy of prehearing conferencing allowances and will soon decide whether to extend that initiative. We also received technical comments from SSA, which we incorporated where appropriate. SSA's comments are reprinted in appendix I. We are providing copies of this report to the Director of the Office of Management and Budget and the Commissioner of the Social Security Administration. We will also make copies available to others upon request. Major contributors to this report are listed in appendix II. If you have any questions concerning this report or need additional information, please call me on (202) 512-7215. Michael T. Blair, Jr., Assistant Director, (404) 679-1944 Carlos J. 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Pursuant to a congressional request, GAO reviewed the Social Security Administration's (SSA) Short-Term Disability Plan (STDP), focusing on: (1) progress made by SSA's Office of Hearings and Appeals (OHA) in meeting STDP backlog reduction and case processing goals; (2) the current OHA allowance rate for appealed cases compared with pre-STDP levels; and (3) the accuracy of OHA decisions made under STDP. GAO found that: (1) OHA has made progress in reducing its inventory of appealed cases, but SSA will not reach its goal of reducing this backlog to 375,000 by December 1996; (2) activities under the plan's key initiatives allowed OHA to dispose of about 66,500 more cases than it would have had STDP not been implemented, but despite OHA's increased productivity, as of August 1996 its backlog of appealed cases was about 3 percent higher than in November 1994; (3) since STDP was initiated, the allowance rate has decreased from about 75 percent in fiscal year (FY) 1994 to about 69 percent through the third quarter of (FY) 1996; and (4) SSA has not completed any analysis of the accuracy of STDP decisions or clearly established to what extent, if any, STDP has affected OHA's allowance rate.

Many DOD organizations, collectively known as the missing persons accounting community, have a role in accounting for the missing, as discussed below. The Under Secretary of Defense for Policy (USD (PACOM) are the two top-level Policy) and U.S. Pacific Commandleadership organizations in the accounting community. USD Policy is responsible for developing, coordinating, and overseeing the implementation of DOD policy to account for personnel unaccounted for as a result of hostile acts. The Deputy Assistant Secretary of Defense for Prisoner of War/Missing Personnel Affairs, who reports to the Under Secretary of Defense for Policy, is responsible for, among other things, exercising policy, control, and oversight for the entire process of accounting for missing persons; monitoring and advocating for program funding requirements and resources for the mission; and leading and coordinating related communications efforts, such as the public outreach program. The Defense Prisoner of War/Missing Personnel Office (DPMO) is responsible for, among other things, overseeing archival research and standardizing procedures for methodology and prioritization; rendering final analytic judgments as to what constitutes fullest possible accounting for each case by identifying possibilities for future action, or determining when no further pursuit is possible; and defining, maintaining, and enumerating accounting lists. The DPMO Director is responsible for overseeing the execution of DPMO's mission and duties. The Deputy Assistant Secretary of Defense for Prisoner of War/Missing Personnel Affairs serves as the DPMO Director and reports to USD Policy in that capacity as well. PACOM exercises authority over the Joint Prisoner of War/Missing in Action Accounting Command (JPAC), which is responsible for conducting operations in support of achieving the missing persons accounting mission. In 2003 JPAC was established as a Joint Command by the merger of the Joint Task Force-Full Accounting with the Central Identification Laboratory - Hawaii in order to achieve unity of command, permanence of operational elements, and efficiency and effectiveness in the use of DOD's resources, as well as to strengthen the command and control of military forces in achieving the fullest possible accounting. JPAC's functions include analysis, archival research, investigations, recoveries, repatriations, identifications, and reporting. The Central Identification Laboratory is the laboratory component of JPAC. The military services have a role, with their service casualty offices serving as the primary liaison for families concerning missing persons recovery and accounting. Officials from these offices also assist families and help explain the methods used to account for their missing loved ones. Additional activities include gathering family deoxyribobucleic acid (DNA) reference samples, coordinating responses to family inquiries and concerns, and maintaining family contact information. The past conflict accounting section of the Armed Forces DNA Identification Laboratory conducts DNA analyses of remains of missing persons from past military conflicts for JPAC and its laboratory component, the Central Identification Laboratory, and maintains the past conflict accounting family reference sample database, to include processing of all DNA references. The Armed Forces DNA Identification Laboratory is part of the Armed Forces Medical Examiner System, which reports to the Army Surgeon General. The Life Sciences Equipment Laboratory provides technical and analytical support to the accounting community, and is primarily tasked by JPAC's Central Identification Laboratory to analyze and identify life science equipment-related artifacts that have been recovered and may potentially be related to missing persons cases. The Life Sciences Equipment Laboratory is part of the Air Force Materiel Command. In addition to these members of the missing persons accounting community, many other organizations play a role in the missing persons accounting process, including the Office of the Under Secretary of Defense for Personnel and Readiness, the Chairman of the Joint Chiefs of Staff, the Office of the Under Secretary of Defense for Intelligence, and the State Department. In addition, family and veterans organizations serve as constituency groups to the accounting community. The department's response to the accounting-for goal established in the National Defense Authorization Act for Fiscal Year 2010 brought into sharp relief longstanding disputes that have not been addressed by top- level leaders, and have been exacerbated by the accounting community's fragmented organizational structure. As I will describe in more detail later in this statement, leadership from the Under Secretary of Defense for Policy and Pacific Command have been unable to resolve disputes between community members in areas such as roles and responsibilities and developing a community-wide plan to meet the statutory accounting- for goal. Further, the accounting community is fragmented in that the community members belong to diverse parent organizations under several different chains of command. With accounting community organizations reporting under different lines of authority, no single entity has overarching responsibility for community-wide personnel and other resources. For example, although the Deputy Assistant Secretary of Defense for Prisoner of War/Missing Personnel Affairs has statutory responsibility for policy, control, and oversight of the entire accounting process, JPAC--which performs investigations, recoveries, identifications, and other key functions--falls under the authority of PACOM, rather than reporting to the Deputy Assistant Secretary of Defense for Prisoner of War/Missing Personnel Affairs. As a result, no single entity can implement or enforce decisions without obtaining widespread consensus. We have previously reported that having a single designated leader is often beneficial because it centralizes accountability for achieving outcomes and can accelerate decision-making. Concerns have arisen over the years, both within and outside of DOD, with regard to whether the current organizational structure of DOD's missing persons accounting community enables the community to most effectively meet its mission. For example, a 2006 Institute for Defense Analyses study concluded that significant improvements could be made by increasing the lines of coordination in the accounting community and recommended that the community acknowledge DPMO as the leader in the accounting effort. The study also described some of the problems associated with the current organization; for example, that DPMO does not have tasking authority over the other organizations, and that while there are multiple lines of authority, no one organization has effective authority over execution of the entire mission. In our July 2013 report, we found that a majority of accounting community and DOD stakeholder organizations believe that an alternative organizational structure for the accounting community would be more effective. We administered a questionnaire asking representatives from each accounting community organization whether various options for reorganizing the missing persons accounting community could improve the community's ability to meet its mission. One question asked respondents to rank five organizational options that would best enable the accounting community to meet its mission. We found that 12 of the 13 survey respondents who answered the question ranked an option with a more centralized chain of command as the most effective in enabling the accounting community to achieve its mission. Ten of these 12 respondents ranked the current organizational structure as the least effective or second least effective option for achieving the mission of the accounting community. Responses to our questionnaire also demonstrated a lack of confidence about the current organizational structure among many community and DOD stakeholder organizations. For example, 13 of the 14 survey respondents indicated that the current organizational structure did not enable or only somewhat enabled the community to develop the required capability and capacity to achieve the accounting-for goal. In addition, 12 respondents indicated that the current organizational structure did not enable or only somewhat enabled the community to collectively determine necessary resources. Furthermore, 9 respondents indicated that the current organizational structure did not at all enable the accounting community to define and agree on their respective roles and responsibilities. In contrast, not a single organization we surveyed ranked the current organizational structure as the most effective organizational option, and only three organizations--USD Policy, PACOM, and JPAC--ranked the current organizational structure as the second most effective organizational option. Illustrating a disconnect between leadership's perspective and the rest of the community, only two organizations in our survey--USD Policy and PACOM, the two top-level leadership organizations in the accounting community--responded that the current structure greatly enables appropriate senior leadership involvement. USD Policy and PACOM stated that all of the organizational options, including the current organizational structure, offer access to DOD senior leadership. In addition, senior officials from these offices questioned whether the benefit of reorganization would result in real change and would be worth undergoing turmoil in the organization. While we recognize that a reorganization may pose challenges, such as creating the potential for short-term impacts on operations due to disruption, our findings in our July 2013 report show that the majority of accounting community members and other stakeholders lack confidence in the status quo, and we believe that the potential benefits of reorganizing and/or clarifying roles and responsibilities could outweigh those challenges. We recommended in our July 2013 report that the Secretary of Defense examine options for reorganizing the accounting community, to include considering organizational options that provide a more centralized chain of command over the accounting community's mission. DOD concurred with this recommendation, stating that it will consider options for reorganizing the accounting community, ranging from maintaining the status quo to consolidation of DPMO and JPAC, as well as examining whether the Life Sciences Equipment Laboratory might also be included in this consolidation. DOD explained that the consolidated organization could be placed under the Office of the Secretary of Defense or a non- geographic combatant command to facilitate its worldwide mission and avoid competition for resources with a geographic combatant command's war-fighting priorities. While DOD is working to revise its existing guidance and develop new guidance, the roles and responsibilities of the various members of the missing persons accounting community are not all clearly articulated in existing DOD directives or instructions. We have previously reported on the need for collaborating agencies to work together to define and agree on their roles and responsibilities. DOD has established several directives and instructions related to the missing persons accounting program. However, none of this guidance clearly delineates the specific roles and responsibilities of all the organizations comprising the missing persons accounting community in the four key areas that we examined for our July 2013 report: (1) equipment and artifact identification and analysis, (2) research and analysis, (3) investigations, and (4) family outreach and external communications. Disagreements over roles and responsibilities where the guidance is broad or vague enough to support different interpretations has led to discord, lack of collaboration, and friction among the community's members, and particularly between DPMO and JPAC. For example, JPAC views itself as having the lead on operational activities, such as conducting investigation and recovery missions, and JPAC officials expressed concerns with DPMO's plans to conduct some operational activities. Moreover, the lack of clarity in the guidance has given rise to overlapping and fragmented efforts among accounting community members. We have previously reported that overlap in efforts may be appropriate in some instances, especially if agencies can leverage each others' efforts. In other instances, however, overlap may be unintended, may be unnecessary, or may represent an inefficient use of U.S. government resources. As described in table 1, in implementing the accounting mission, we found that overlapping and duplicative efforts have led to inconsistent practices and inefficiencies in four key areas. Today, I will highlight one of those areas: equipment and artifact identification and analysis. JPAC and the Life Sciences Equipment Laboratory disagree about the laboratory's roles and responsibilities for equipment and artifact identification and analysis, and DOD guidance is vague regarding those responsibilities. As a result, the interactions between JPAC's Central Identification Laboratory and the Life Sciences Equipment Laboratory have been inefficient and ineffective and have led to underutilizing government resources, as the following example demonstrates. JPAC and Life Sciences Equipment Laboratory officials disagree about roles and responsibilities in terms of which conflicts and types of equipment the Life Sciences Equipment Laboratory can analyze. JPAC officials told us it is unlikely that they would forward case work to the Life Sciences Equipment Laboratory for conflicts other than Vietnam, and that they do not send ground equipment remnants to the equipment laboratory, regardless of conflict. Conversely, Life Sciences Equipment Laboratory officials stated that their capabilities can support analysis of cases for conflict periods ranging from World War I through current military operations for all military services, and that their mission includes analyzing artifacts recovered at aircraft crash or ground action loss sites. Further, a 2004 memorandum of agreement between JPAC and the Life Sciences Equipment Laboratory states that the Life Sciences Equipment Laboratory has the capability to provide analysis for equipment from World War II, Korea, Vietnam, the Cold War, and current day conflicts. Life Sciences Equipment Laboratory officials expressed concern that JPAC and its Central Identification Laboratory are trying to exclude the Life Sciences Equipment Laboratory from the accounting process by downplaying its potential contributions. This example shows how the lack of clearly defined roles and responsibilities has led to disagreements and inefficient and ineffective interactions among community members. Since 2010, DPMO has attempted to address issues surrounding the accounting community organizations' roles and responsibilities by developing new guidance or revising existing guidance, but these efforts have not been completed. DPMO has drafted a revision to DOD Directive 2310.07E and has also drafted a new DOD instruction to provide more clarity with regard to roles and responsibilities. As of May 2013, however, neither the draft instruction nor the revised directive had been finalized, because the drafts had been stymied by disagreements among community members regarding their respective roles and responsibilities as stated in the drafts. Both DPMO officials and JPAC officials said they have made progress in addressing these areas of disagreement, and DPMO officials stated that they hoped to have the draft directive finalized by September 2013 and the draft instruction published by March 2014. Because the drafts of these documents are still under revision, it is unclear whether the final guidance will clarify the roles and responsibilities sufficiently to address the four areas of overlap and disagreement summarized in table 1 above. Until DOD issues its revised directive and new instruction that more clearly define the roles and responsibilities of all the accounting community organizations, these areas of inefficient overlap may continue, and the disputing factions within the accounting community may continue to hinder future progress. Consequently, we recommended in our July 2013 report that the department revise and issue guidance to clarify roles and responsibilities of accounting community members and negotiate a new memorandum of agreement between the Life Sciences Equipment Laboratory and JPAC. DOD concurred with both of these recommendations. While DOD has made some progress in drafting a community-wide plan to increase its capability and capacity to meet the statutory accounting-for goal, as of June 2013 DOD had not completed a community-wide plan. We have previously reported that overarching plans can help agencies better align their activities, processes, and resources to collaborate effectively to accomplish a commonly defined outcome. However, our July 2013 report found that community-wide planning to meet the accounting-for goal established by Congress has been impeded by disputes and by a lack of coordination among members of the missing persons accounting community, with DPMO and JPAC developing two competing proposed plans, neither of which encompassed the entire accounting community. In response to a December 2009 memorandum from the Deputy Secretary of Defense directing the Deputy Assistant Secretary of Defense for Prisoner of War/Missing Personnel Affairs to begin planning to meet the accounting-for goal, USD Policy and PACOM allowed the development of these two competing proposed plans for obtaining additional funding and resources to meet the mandated capability and capacity. According to DPMO officials, neither the Joint Staff nor USD Policy provided oversight or intervention in the disagreement. These officials stated that such oversight and intervention could have helped JPAC and DPMO to resolve their impasse by improving communication, interaction, and cooperation. Both plans called for increased capability and capacity and for a new satellite remains identification laboratory located in the continental United States. However, the two plans differed as to which organization would have control over much of the increased capability and capacity, with each plan favoring the organization that authored it. The other accounting community members and their resource needs were not mentioned in either proposed plan. The dispute concerning the competing proposed plans was resolved through DOD's Program Budget Review Process in January 2011, after being assessed by a DOD-wide team led by DOD's Office of Cost Assessment and Program Evaluation. In a DOD resource management decision, DOD programmed more than $312 million in proposed additional resources over fiscal years 2012 through 2016 in support of JPAC's plan, including an additional 253 personnel--reflecting a greater than 60 percent increase over JPAC's 2011 level. However, key parts of JPAC's plan are not being realized. For example, JPAC has been unable to conduct the number of investigation and recovery missions called for in the plan, in part due to an inability to hire the additional personnel who had been authorized and also in part due to the budget reductions and expected furloughs associated with sequestration. As of May 2013, the JPAC plan, which does not incorporate the larger accounting community, is DOD's only plan to increase capability and capacity to account for missing persons. While the community has taken some recent steps to draft a community- wide plan as directed by the 2009 memo from the Deputy Secretary of Defense, we found that disagreements between JPAC and DPMO hindered progress in developing the community-wide plan. According to both DPMO and JPAC officials, the areas of disagreement included topics such as (1) the division of research and analysis responsibilities between DPMO and JPAC; (2) determination of the appropriate levels of effort for each of the various conflicts; and (3) agreement on a policy to address lower priority cases that have been on JPAC's list of potential recovery sites for a long time. As of June 2013, DPMO and JPAC officials said that the areas of disagreement had been informally resolved and needed to be documented. DPMO had developed a draft of the community-wide plan, but DPMO officials explained that the draft would not be sufficiently comprehensive to share for review among the community members until it incorporated the informal agreements that have recently been resolved. The officials stated that they now plan to finalize the community-wide plan by the end of calendar year 2013. In the absence of a community-wide plan, the members of the accounting community have had varied success in independently identifying and obtaining funds and resources to help meet the accounting-for goal. Moreover, there is no community-wide process to provide resources for the missing persons accounting mission. Each member organization of the accounting community has its own processes for requesting resources, because they belong to diverse parent organizations, and these processes are not integrated or coordinated. Until DOD finalizes a community-wide plan that addresses the resource needs of community members as well as changes in planned operations, the accounting community will be challenged to justify the resources it needs to increase DOD's capability and capacity to account for at least 200 missing persons a year by 2015, and DOD's ability to achieve that required increase may be at risk. We recommended in our July 2013 report that the department finalize the community-wide plan to develop the increased capability and capacity required by statute, with the support and participation of all community members. DOD concurred with our recommendation. In total, our full report contains nine recommendations with which DOD generally concurred. The report also contains DOD's comments, which state the steps the department plans to take to implement our recommendations. In conclusion, while we are encouraged that DOD generally concurred with all nine of the recommendations in our July 2013 report, we note that prompt action on the part of the department to address these recommendations is critical, because the 2015 timeframe for DOD to meet the accounting-for goal is rapidly approaching. Further, as time passes, the information needed for missing persons recoveries continues to deteriorate. Families have been waiting for decades to discover the fate of their loved ones, and the weaknesses that we identified in DOD's capability and capacity to account for missing persons jeopardize the department's ability to provide some measure of closure to those families whose loved ones are still missing as a result of their service to their country. Chairman Wilson, Ranking Member Davis, this concludes my prepared remarks. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have. For future questions about this statement, please contact Brenda S. Farrell, Director, Defense Capabilities and Management, at (202) 512- 3604 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include Margaret Best, Assistant Director; Renee Brown, Terry Richardson, Leigh Ann Sennette, Cheryl Weissman, Allen Westheimer, and Michael Willems. 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 findings and recommendations about DOD's missing persons accounting mission from our recently issued report, DOD's POW/MIA Mission: Top-Level Leadership Attention Needed to Resolve Longstanding Challenges in Accounting for Missing Persons from Past Conflicts. DOD reports that more than 83,000 persons are missing from past conflicts in Vietnam, Korea, the Cold War, the Persian Gulf, and World War II. Since the early 1970s, DOD has identified the remains of and accounted for approximately 1,910 persons. Several DOD components and organizations, collectively known as the missing persons accounting community, have a role in accounting for missing persons. Between 2002 and 2012, DOD accounted for an average of 72 persons each year. In 2009, Congress established an accounting-for goal in Section 541 of the National Defense Authorization Act for Fiscal Year 2010. This act required the Secretary of Defense to provide such funds, personnel, and resources as the Secretary considers appropriate to increase significantly the capability and capacity of DOD, the Armed Forces, and commanders of the combatant commands to account for missing persons, so that the accounting community has sufficient resources to ensure that at least 200 missing persons are accounted for annually, beginning in fiscal year 2015.The law also added all World War II losses to the list of conflicts for which DOD is responsible, thus increasing from about 10,000 to 83,000 the number of missing persons for whom DOD must account. In 2012, in a committee report to accompany a bill for the National Defense Authorization Act for Fiscal Year 2013, the House Armed Services Committee mandated that GAO review DOD's efforts to increase its capability and capacity to account for missing persons. GAO will focus on three key issues identified in the report, specifically: (1) the accounting community's organizational structure, (2) the lack of clarity regarding community members' roles and responsibilities, and (3) DOD's planning to meet the statutory accounting-for goal. The department's response to the accounting-for goal established in the National Defense Authorization Act for Fiscal Year 2010 brought into sharp relief longstanding disputes that have not been addressed by top-level leaders, and have been exacerbated by the accounting community's fragmented organizational structure. Leadership from the Under Secretary of Defense for Policy and Pacific Command have been unable to resolve disputes between community members in areas such as roles and responsibilities and developing a community-wide plan to meet the statutory accounting-for goal. Further, the accounting community is fragmented in that the community members belong to diverse parent organizations under several different chains of command. With accounting community organizations reporting under different lines of authority, no single entity has overarching responsibility for community-wide personnel and other resources. While the Department of Defense (DOD) is working to revise its existing guidance and develop new guidance, the roles and responsibilities of the various members of the missing persons accounting community are not all clearly articulated in existing DOD directives or instructions. GAO has previously reported on the need for collaborating agencies to work together to define and agree on their roles and responsibilities. DOD has established several directives and instructions related to the missing persons accounting program. However, none of this guidance clearly delineates the specific roles and responsibilities of all the organizations comprising the missing persons accounting community in the four key areas that GAO examined for the July 2013 report: (1) equipment and artifact identification and analysis, (2) research and analysis, (3) investigations, and (4) family outreach and external communications. Disagreements over roles and responsibilities where the guidance is broad or vague enough to support different interpretations has led to discord, lack of collaboration, and friction among the community's members, and particularly between the Defense Prisoner of War/Missing Personnel Office (DPMO) and Joint Prisoner of War/Missing in Action Accounting Command (JPAC). While DOD has made some progress in drafting a community-wide plan to increase its capability and capacity to meet the statutory accounting-for goal, as of June 2013 DOD had not completed a community-wide plan. GAO has previously reported that overarching plans can help agencies better align their activities, processes, and resources to collaborate effectively to accomplish a commonly defined outcome. However, GAO's July 2013 report found that community-wide planning to meet the accounting-for goal established by Congress has been impeded by disputes and by a lack of coordination among members of the missing persons accounting community, with the DPMO and JPAC developing two competing proposed plans, neither of which encompassed the entire accounting community.

Performance-based logistics is the DOD term for the process of (1) identifying a level of performance required by the warfighter and (2) negotiating a performance-based contract between the government and the product support integrator--that is generally the original equipment manufacturer of the total system--to provide long-term total system support for a weapon system at a fixed level of annual funding. Instead of buying spares, repairs, tools, and data in individual transactions, the method in a performance-based logistics arrangement is to buy a predetermined level of availability that meets the warfighter's objectives. To implement performance-based logistics, DOD selects a product support integrator to serve as the single point of accountability, integrating support from all sources to achieve the performance outcome metrics specified in the performance-based support agreement. The metrics used include operational availability (a measure of the degree to which an item is in an operable state and can be committed at the start of a mission when the mission is called for at an unknown point in time); mission capability (the material condition, indicating that it can perform at least one and potentially all of its designated missions); and customer wait time (the total elapsed time between issuance of a customer order and fulfillment of that order). For example, the Navy now uses two metrics for its performance-based contract for the T-45 aircraft system--"ready for training," which requires that the contractor have a minimum number of aircraft ready for training at 7:00 AM each business day in order to achieve a 57 percent aircraft availability; and "sortie completion," which requires that the contractor meet 98 percent of the requirements for the scheduled training flights. As an incentive, the contract pays a performance bonus (maximum of $5 million annually) if the contractor exceeds the performance metrics. If the contractor only meets--or fails to meet--the minimum metrics, the contractor then receives none of the annual performance bonus. DOD Directive 5000.1, the Defense Acquisition System, highlights the department's preference for using performance-based logistics at the platform level, stating, "Program Managers shall develop and implement performance-based logistics strategies that optimize total system availability while minimizing cost and logistics footprint." As part of its implementation of this strategy, in 2003 DOD proposed that the Congress adopt legislative changes that would allow the services to increase the appropriations allocation flexibility within a weapon system program, allowing the program manager to use funds from different accounts (such as operation and maintenance; research, development, test, and evaluation; and procurement) to pay for system support costs. Although this proposal was not adopted, DOD continues to pursue various avenues that would support the overall objective of having greater flexibility by using a single line of support funding managed by the program office for total system operation and maintenance costs. Most recently, on February 4, 2004, the Deputy Secretary of Defense (1) directed the Under Secretary of Defense (Acquisition, Technology, and Logistics) in conjunction with the Under Secretary of Defense (Comptroller) to issue clear guidance on purchasing using performance criteria; and (2) directed each service to provide a plan to aggressively implement performance- based logistics, including transferring appropriate funding as needed, on current and planned weapon system platforms for fiscal years 2006-2009. While this directive does not preclude the services from using performance-based logistics contracts below the platform level, it does express DOD's intent to apply the concept at the platform level as a preferred practice. As we discuss in the next section, DOD has established separate goals for implementing performance-based service contracts, and the services have identified many contracts as performance-based logistics arrangements that are, in fact, below the platform level. However, according to Office of Secretary of Defense officials, DOD would like to implement performance-based logistics at the platform level to move from contracting for material availability to weapon system availability. DOD considers that the platform level offers the metrics needed to implement a true performance-based logistics arrangement. The Office of Management and Budget indicates that performance-based service contracting, from which performance-based logistics has evolved, has been referenced in regulation, guidance, and policy for more than two decades, and federal agencies have used performance-based contracting to varying degrees for acquiring a range of services. In 1991 the Office of Management and Budget issued a policy letter establishing the use of a performance-based approach for service contracting, and in 1994 it initiated a governmentwide pilot project to encourage the use of performance-based service contracts in federal agencies, including DOD. The use of performance-based service contracts to acquire services offers a number of potential benefits, particularly when services are acquired by means of a fixed price agreement. Performance-based contracts can encourage contractors to be innovative and to find cost-effective ways of delivering services for a fixed level of funding. By shifting the focus from process to results, these contracts can potentially produce better outcomes and reduced costs. In view of the potential benefits, Congress has been encouraging greater use of performance-based service contracting. In an August 2003 memorandum to the military departments, the Under Secretary of Defense (Acquisition, Technology and Logistics) stated that DOD should continue to increase its use of performance-based service acquisitions. He noted that DOD has a goal to award 50 percent of contract actions and dollars using performance-based specifications by fiscal year 2005. The more specific concept of performance-based logistics as an approach for supporting military systems emerged from DOD's 1999 study, Product Support for the 21st Century, which identified 30 pilot programs (10 in each military department) to test logistics support reengineering concepts that placed greater reliance on the private sector. Many of the pilots involved various types of contractor logistics support, prime vendor support, or performance-based type arrangements. Others focused on including reduced operation and support costs and improved readiness as performance requirements for new system development. The September 30, 2001, Quadrennial Defense Review advanced DOD's move toward this concept by advocating the implementation of performance-based logistics with appropriate metrics that would be designed to compress the supply chain and improve the readiness of major weapon systems and commodities. A November 2001 Office of the Deputy Under Secretary of Defense document, Product Support for the 21st Century: A Program Manager's Guide to Buying Performance, intended as a guide for program managers, stated that program managers will implement performance-based logistics on all new systems and on acquisition category I and II fielded systems selected on the basis of a sound business case. It is unclear how many performance-based logistics programs the services have implemented. In response to our inquiries, the Army identified 74 performance-based logistics programs, the Navy identified 106, the Air Force 4, and the Marine Corps 1. We noted a broad range of contract arrangements is identified under the performance-based logistics umbrella, with many of them initiated under a different name, such as contractor logistics support or total systems support responsibility and later identified as performance-based logistics arrangements. Most of the DOD performance-based logistics arrangements currently identified by the services are used for subsystems or components rather than for weapon system platforms. Fiscal years 2003 to 2007 Defense Planning Guidance required the services to submit plans that identified their implementation schedules for performance-based logistics to all new weapon systems and acquisition category I and II fielded systems. Similarly, a February 13, 2002, letter from the Under Secretary of Defense (Acquisition, Technology, and Logistics) to the services emphasized the need for the plans required by the Defense Planning Guidance and directed that the plans be issued by May 1, 2002. But although the services issued plans, they did not take an aggressive approach toward adopting this concept, according to Office of Secretary of Defense logistics officials. An October 2003 Defense Business Board report encouraged the department to move more quickly in adopting the performance-based logistics, stating, "Performance-based logistics is an industry best practice and a DOD best practice. DOD should consider using it for all its weapon systems, new and legacy, provided it is supported by a business-case analysis." This task force was chartered by the Under Secretary of Defense (Comptroller) and Chief Financial Officer to describe private-sector best practices used in managing supply chain partnering arrangements and to propose how to apply such practices to the supply chain processes used by DOD. Citing this task force report, the aforementioned February 2004 Deputy Secretary of Defense memorandum to the military departments stated, "Delay in implementing this practice complicates our funding, limits industry flexibility, and increases DOD inventory. We must streamline our contracting and financing mechanisms aggressively to buy availability and readiness measured by performance criteria." Because DOD proposes using performance-based logistics at the platform level as the predominant support strategy for its military systems, it may limit opportunities for savings from competition, volume discounts, and reduced administrative costs. Also, by often not contracting for long-term access to technical data, programs officials are further limiting their support options. In the private sector, performance-based contracting is a tool used according to the applicability of subsystem or component and circumstance, when it is cost-effective and reduces risk in a noncompetitive environment. DOD, by contrast, proposes using it as the predominant product support strategy for its military systems. Further, when private-sector companies use performance-based contracting, they use it at the subsystem or component level, retaining the program integration function themselves as a core business function essential to successful business operations. Conversely, DOD policy memoranda support using performance-based contracting at the platform level and using the contractor as the support integrator. Moreover, private sector companies emphasize the importance of having the rights to contracts and competition. DOD, in contrast, is frequently not acquiring the same level of technical data in its acquisition of new programs. While our review of private sector companies did find that half of those we interviewed are using performance-based contracting, the industry approach is much different from DOD's preferred approach for performance-based logistics. As previously discussed, Office of the Secretary of Defense guidance has over the past several years encouraged the services to use performance-based logistics at the weapon system level as the preferred approach for life-cycle management of military systems. DOD officials have stated that this is an industry best practice and should be adopted more aggressively, but in 7 of 14 companies we interviewed that used some type of performance-based contracting, this agreement was used at the subsystem or component level--that is, for engines, auxiliary power units, wheels, or brakes-- and it was generally used for older systems. The following chart characterizes the companies we interviewed by industry type, by the extent to which they outsource logistics support activities, by the predominant contracting practices used, and by the types of subsystems or components outsourced using performance-based contracting. Pseudonyms are used rather than the actual company names. These companies generate annual revenue generally exceeding $1 billion, and they use complex and expensive equipment for which they require high levels of availability and reliability as well as efficiency in managing lifecycle costs. The life-cycle management issues are comparable to those of DOD in managing its weapon system sustainment programs. As shown above, performance-based contracting in the companies we interviewed is most widely used in the air carrier industry, and it also has limited use in the energy exploration and mining industry. According to air carrier officials, time and material contracts are more prevalent than performance contracts, because industry prefers to use short-term (2 to 3 years) competitive contracts when possible. In a sole-source environment companies sometimes use longer-term (10 to12 years) performance-based contracts for supporting some subsystems such as engines, if they have sufficient historical data to establish an accurate baseline. For example, all but one of the air carrier industry companies had performance-based contracts for one or more engines. The amount of engine workload managed by performance-based contracts varied from company to company. For example, Company C, which outsourced 38 percent of its total maintenance workload, used performance-based contracts for one-fifth of its outsourced engine work; while Company A, which outsourced 65 percent of its maintenance workload, used performance-based contracts for all of its engine work. The air carrier companies did not use performance-based contracts for contracted work on airframes, work that generally comprises about 30 percent of the commercial aviation maintenance and repair market. Table 2 provides information regarding the percentage of dollars spent on the repair of each type of subsystem or component managed using performance-based contracts by the air carrier companies and the one non-air carrier company that used performance-based contracts. The subsystems or components for which the companies used performance-based contracts most widely were auxiliary power units and wheels and brakes. Company officials noted that performance-based contracts are a tool most often used selectively in a noncompetitive environment in an effort to control cost and reduce risk. Additionally, they said that performance- based contracting works better for subsystems and components where available cost and performance data are sufficient to establish a good business case analysis, noting that this is more difficult to accomplish for new systems, where performance data are uncertain. Performance-based contracts differ from traditional logistics contracts by focusing on the purchase of weapon system sustainment as an integrated package based on output measures--such as a predetermined level of system availability. In contrast, traditional transaction-based time and material contracts are used to purchase logistics inputs--such as quantities of spare parts, specific repair tasks, and engineering studies. Under transaction-based contracts, the government pays for each transaction as a separate deliverable; whereas under a performance-based contract, the contractor is being paid for achieving an outcome performance metric, regardless of what he does to achieve that performance. In concept, performance-based contracts encourage the contractor to achieve a high level of performance at a fixed cost. However, air carrier industry officials we interviewed said that entering into a performance- based contract without good baseline data introduces a higher level of risk that the arrangement may not be cost-effective. For example, officials from one company said they used a performance-based contract for the older of the two types of engines in the company's inventory. Officials said they would wait to collect sufficient performance data on the newer engine before considering a performance-based contract. The officials noted that they had originally used a performance-based contract on the newer engine, but found that, because the reliability of the engine was greater than expected, the contract arrangement was not cost-effective. The company was able to change the contract to a time and material contract, to allow time to collect sufficient performance data to support a fact-based business case analysis to determine the company's "should" cost amount for a performance-based contract. Performance-based contracting offers DOD opportunities to provide contractors incentives to achieve desired levels of operational performance at a fixed cost when the department has historical performance information. But in the absence of reliable and complete performance data as a baseline, the adoption of this approach as the preferred support strategy for new weapon systems could undermine DOD's ability to negotiate cost-effective terms--particularly since the performance-based contracts at the weapon system level have cost-reimbursement elements, while the private-sector companies generally used fixed-price agreements. Private-sector officials noted that it is important to use fixed prices for materials, since the high price of materials is a key factor driving the companies to use performance-based contracts. DOD policy promotes using performance-based contracting differently from the way private-sector firms use it in supporting complex and expensive systems. The companies we reviewed generally used performance-based contracting at the subsystem level for engines and certain other components rather than at the platform level, as proposed by DOD. Furthermore, when using performance-based contracting, these companies do not contract out the program integration function, as the military services are doing. We found no performance-based contracts for maintenance of airframes or maintenance of any equipment platform among the private-sector companies we reviewed. Industry officials cited three reasons why they believe the use of performance contracts is more advantageous at the subsystem or component level. First, they prefer to take advantage of competition whenever it is available and to manage support contracts through the use of competitive procedures. For example, because airframe maintenance support is available from a competitive market, the companies generally use a combination of fixed price and time and material contracts for this category of service. Conversely, performance- based contracts are often used for engine repair because of the high cost of spare and repair parts that are available only from the original equipment manufacturer. Officials said that there are too few third-party repair vendors to foster competition. Second, company officials emphasized the importance of gaining purchasing power from volume discounts on subsystems or components across their entire fleet of systems as a reason for not implementing performance contracting at the platform level. Finally, by having contracts at the subsystem or component level, companies can avoid the administrative costs that would be charged by a prime integrator. Similar to the approach used by the companies we reviewed, we noted that the Navy has used performance-based contracts primarily at the subsystem or component level. Navy officials said that implementation at this level is easier because the service could implement this concept more readily under DOD's current funding structure. The funding is handled through the working capital fund, with reimbursement to the fund coming from the sale of subsystems or components to the fleet. Navy officials also noted that by implementing performance-based logistics at this level, they can save money by competing subsystems or components where a competitive market exists, consolidating the requirements of multiple programs and leveraging their buying power to obtain a pricing advantage, and reducing administrative costs--advantages also recognized by the private sector. The Navy's history of using a performance-based contract for logistics support of the T-45 trainer aircraft illustrates how savings may be achieved by implementing the concept at the subsystem level rather than the weapon system level. The program office originally had a performance- based contract for the entire weapon system with the original equipment manufacturer. The contract was a 5-year firm-fixed price with an option for a sixth year period. Program office officials said the sole metric used, ready-for-training aircraft, resulted in there being an insufficient number of aircraft available to fly scheduled training sorties. Additionally, because actual flying hours were fewer than forecasted, the Navy was paying for flying hours it was not flying. Concluding that benefits weren't as expected, that the costs were too high, and that savings were achievable by negotiating separate contracts for the airframe and engine, the program office chose not to exercise the option. The new engine contract is a performance-based contract awarded on a sole-source basis to the engine manufacturer, and the airframe performance-based contract was awarded competitively. According to Navy program office officials, the revised approach resulted in a projected savings of $37 million in the first year and projected savings of $144 million at the end of a 5-year period. The savings are being achieved through elimination of the administrative costs charged by the prime contractor for the engine work and through competition for the aircraft system. Another potential adverse effect of awarding a performance-based contract at the weapon system level is the loss of management control and expertise over the system that private-sector firms said was essential to the success of their business operations. Industry officials said that managing their supplier base and ensuring the availability of their equipment to generate revenue is too critical to entrust to a second party. Further, they believe that contracting out support at a platform level by using a system integrator limits the potential to optimize savings through competition and volume discounts and adds administrative costs charged by the prime integrator for managing subcontractors. The spokespersons for every company we visited told us that when they purchase equipment they make sure to acquire the technical data necessary to support it, regardless of whether the company intends to support the equipment in-house or outsource some of its support operations. Company officials said that this data was essential to their own management and oversight functions. For example, officials from a company that outsources most of its repairs pointed out that its engineers use the data to perform such tasks as establishing reliability metrics, evaluating performance, and revising repair standards. Additionally, officials stated that owning the technical data afforded their companies the flexibility that enabled them either to perform the work in-house or to offer the work up for competition. Several company officials said that it is best to obtain the technical data at the time the equipment is purchased, when the buyer has the most leverage in its negotiations with the manufacturer. Trying to obtain the technical data at a later time is difficult to negotiate and more expensive. These companies do not price their technical data items separately. DOD program offices, however, negotiate a price for maintenance-and-repair technical data separately from the price of the military hardware systems. According to service competition- advocate officials, program managers faced with limited acquisition dollars often make trade-off decisions to buy increased weapon system capability in lieu of technical data. We reported in 2002 that DOD program offices have often failed to put adequate emphasis on obtaining needed technical data during the acquisition process. We recommended that DOD emphasize the importance of obtaining technical data and consider including a priced option for the purchase of technical data when considering proposals for new weapon systems or modifications to existing systems. DOD concurred with our recommendation, noting that there was a requirement in DOD 5000.2R for program offices to provide long-term access to data required for the competitive sourcing of systems support throughout the life cycle. Additionally, by implementing total life-cycle systems management, DOD would strengthen its emphasis on acquiring technical data when negotiating support agreements with logistics providers. Nonetheless, the DOD has further diminished the emphasis it places on the need to acquire rights to technical data. For example, in May 2003, DOD replaced its acquisition regulation with a streamlined instruction, which eliminated the prior regulation's requirement for the program manager to provide for long-term access to data required for the competitive sourcing of weapon system support throughout the life cycle of the system. This language is now provided as guidance in the Interim Defense Acquisition Guidebook, but it is not mandatory that this guidance be followed. According to DOD and service logistics officials, program managers should develop strategies that provide the government with sufficient and affordable technical data rights to enable them to put the work out for competition or develop alternate public or private sources for weapon system support if performance-based logistics arrangements fail or become too expensive. Logistics officials recognize that program managers who implement performance-based logistics contracts on new weapon systems may wish to delay taking delivery of technical data early in the life of the system, because unlike the stable designs of commercial equipment purchased in the private sector, the data for cutting edge technology lacks maturity and is frequently changed. Alternatively, program managers sometimes pay the original equipment manufacturers both to maintain the technical and weapon system configuration data and to provide the program managers with sufficient access to enable them to manage and oversee the performance-based logistics contract. However, logistics officials agree that the product support strategy should clearly provide for the future delivery of the technical data when required to support competition or alternative source development. Service logistics and competition-advocate officials said that it is critical that this strategy be developed during the weapon system acquisition phase, when the program office has its greatest leverage in negotiating the price of the technical data and the conditions under which the manufacturer must deliver the data. For example, in the course of the acquisition of the V-22 aircraft engine, the Navy program office obtained a technical data license agreement, according to which the manufacturer agreed to deliver a complete data package if it failed to perform in compliance with the statement of work at the agreed-to price and schedule. Conversely, when the program office does not obtain the technical data at the time of purchase, the future costs for obtaining these data are not knowable and, without the leverage of the original package purchase, could be prohibitively expensive. In our review of data collected from DOD's performance-based logistics program offices, we noted that DOD had not negotiated for the maintenance drawing packages for the Javelin missile, F-117 aircraft, and TOW missile improved target acquisition system, and DOD would have to purchase them at a later date at a price to be negotiated. In April 2004, the Logistics Management Institute reported in a review of performance-based logistics arrangements that it found no evidence to indicate either the quantity or the quality of logistics management data-- including technical data--available to the government was compromised by the use of performance-based logistics arrangements. This report also noted, however, that the acquisition guidance published by the Office of the Secretary of Defense does not address strategies for terminating interim contractor support or performance-based logistics contracts. The Logistics Management Institute report recommended that the Defense Acquisition Working Group include performance-based logistics "exit strategy" guidance in the defense acquisition guidebook. Nonetheless, as we have previously noted, guidance in this handbook is not mandatory. The use of performance-based contracting for the support of complex and costly military systems offers opportunities for military program managers to incentivize contractors to achieve desired levels of weapon system performance. However, our review of the use of the practice in private-sector firms indicates that DOD's proposed guidance to adopt performance-based logistics aggressively at the platform level could limit competition, and such guidance might not be the most cost-effective approach for using this concept. Additionally, although DOD based its rationale for using performance-based logistics at least partially on the perception that this is an industry best practice, it appears that perception is not the case. DOD's approach toward implementing the concept appears inconsistent with the way private-sector companies we interviewed use performance-based contracting in acquiring support for their equipment, and DOD's approach has risks that should be addressed as it develops its guidance for using performance-based logistics. Using performance-based logistics as the preferred approach for managing the support of major weapon system programs--even though private- sector company officials use performance-based contracting selectively, when appropriate and cost-effective--carries the risk of increasing life- cycle cost. Both private- and public-sector experiences with performance- based contracting illuminate the challenges involved in developing a meaningful baseline for establishing a performance-based arrangement for new systems, because not enough is known early in the program about performance characteristics and because there is risk to both the program office and the contractor that may translate into high cost. Additionally, the use of performance-based logistics can limit the competition that would be available for providing logistics support when support decisions are made at the subsystem or component level rather than at the platform level. Using performance-based logistics at the platform level also creates risk by contracting out the program integration function--a core function that private contractors consider essential for the cost-effective management of costly and complex systems over their life cycle. Finally, adopting performance-based logistics at the weapon system platform level may be influencing program offices to obtain access only to technical data necessary to manage the performance-based contract during the acquisition phase--and not to provide a strategy for the future delivery of technical data in case the performance-based arrangement fails. In such a case, the program manager would have limited flexibility in choosing whether to perform maintenance in-house, select an alternative vendor, or offer the work for competition. In order for the department to improve the implementation of performance-based logistics, we recommend that the Secretary of Defense direct that the Under Secretary of Defense (Acquisition, Technology and Logistics) and the Under Secretary of Defense (Comptroller) implement the following two recommendations: 1. Incorporate in DOD's guidance to the services the private sector's practice of using performance-based logistics as a tool to achieve economies at the subsystem or component level, rather than as a preferred practice at the platform level. Also, incorporate the private sector's practice of using it when sufficient performance data are available to establish a meaningful cost baseline and 2. Consider requiring program offices, during weapon system acquisition, to develop acquisition strategies that provide for the future delivery of sufficient technical data to enable the program office to select an alternate source--public or private--or to offer the work out for competition if the performance-based arrangement fails or becomes prohibitively expensive. In commenting on a draft of this report, DOD concurred with our recommendations to enhance the implementation of performance-based logistics. Regarding our recommendation to incorporate in its performance-based logistics guidance to the services the private sector's practice of using performance-based logistics as a tool to achieve economies at the subsystem or component level, DOD's response stated that the department recognizes the need to re-emphasize the use of performance-based logistics for subsystems and components in its policy memorandum and guide books. Nonetheless, the response noted that the department believes that it is still prudent to pursue performance-based logistics strategies at the platform level where supported by a business case analysis. The private sector companies we interviewed noted that the more cost effective alternative is to use competitive procedures where practicable at the subsystem or component level supported by a cost analysis using reliable performance data. Regarding our comment that DOD also incorporate in its guidance the private sector practice of using performance-based logistics when sufficient performance data are available to establish a meaningful cost baseline, DOD stated that its policy is that a business case analysis should be performed to help make the determination to use performance-based logistics or traditional logistics support arrangement, and that the business case analysis incorporate the use of performance data, if available, in establishing a meaningful cost baseline. DOD stated that it will emphasize the use of performance data in a revised policy memorandum on performance-based logistics. However, based on information we obtained from the private sector companies we interviewed, developing reliable cost and performance data to support a valid cost analysis at the platform level for a new system will be a challenge and may not be reliable in identifying the most cost-effective support option over the life cycle of the system. As we noted in our report, one company tried a performance- based contract for a new engine but found that because the reliability of the engine was greater than expected, this contract management was not cost-effective. Company officials said they preferred to collect reliable performance data over a period of time to support negotiations for a performance-based contract. In response to our recommendation to consider requiring program offices to develop acquisition strategies that provide for the future delivery of sufficient technical data to select an alternate source--public or private-- or to offer the work out for competition if the performance-based arrangement fails or becomes prohibitively expensive, DOD stated that it will take steps to address this issue in the next iteration of the DOD Directive 5000.1 and DOD Instruction 5000.2 acquisition regulation policy. According to the response, the new policy will require the program manager to establish a data management strategy that requires access to the minimum data necessary to sustain the fielded system, recompete or reconstitute sustainment if necessary, promote real time access vice delivery of the data, and provide for the availability of quality data at the point of need for the intended user. According to DOD, for performance- based logistics arrangements, these actions will include acquiring the appropriate technical data to support an exit strategy should the arrangement fail or become too expensive. The objectives of our review were to determine (1) what types of contractor support practices the private sector used to support complex and costly equipment that have life-cycle management issues similar to military weapons systems and (2) what potential lessons could be learned through a comparison of private sector contractor logistics support practices that DOD currently uses, or plans to use, under its implementation of performance-based logistics. To identify commercial industries that use complex and costly equipment with life-cycle management issues similar to military weapon systems, we interviewed DOD depot maintenance and logistics policy officials. We also conducted a literature search to identify appropriate industry groups and interviewed officials from the Industrial College of the Armed Forces, the Aerospace Industries Association, the American Association of Port Authorities, International Council of Cruise Lines, the Society for Mining Metallurgy and Exploration, the Construction Industry Institute, and the Council of Logistics Management to validate and refine the identified industries and to identify appropriate candidate companies within the industry groups. Within the air carrier, maritime shipping, energy exploration, mining, and entertainment industries, we identified over 250 companies and selected 67 companies based on sales/revenues, production rankings, and management awards that might be good candidates for our study. We eliminated three companies that did not outsource significant amounts of logistics support, and 50 companies either did not respond to our initial inquires or declined to participate in the study. Fourteen companies agreed to participate and completed our interviews and follow-up questions. Thirteen of the 14 companies we interviewed agreed to be identified and are listed below by industry group: Air carriers (Continental Airlines, Houston, Texas; Delta Air Lines, Atlanta, Georgia; FedEx Corp., Memphis, Tennessee; Southwest Airlines, Dallas, Texas; and United Airlines, San Francisco, California); Energy Exploration and Mining (British Petroleum, Houston, Texas; Diamond Offshore, Houston, Texas; Phelps Dodge, Phoenix, Arizona; and Vulcan Material, Birmingham, Alabama); Maritime (Carnival Cruises, Miami, Florida; Conoco Philips Polar Tanker, Long Beach, California; and Disney Cruise, Orlando, Florida); and Entertainment (Disney World, Orlando, Florida). To identify private sector support practices, including performance-based logistics, we conducted group discussions with respective company officials responsible for maintenance and support operations, budgeting, and contracting. To collect consistent information among the companies, we developed standard group discussion questions based on our literature search and discussions with industry experts. We also included questions to determine how the companies addressed logistics and contracting issues similar to those that DOD faced in implementing performance- based logistics. We analyzed the responses to identify the prevailing industry practices in supporting complex and costly equipment, especially focusing on the contracting approaches and practices used to outsource support functions and activities. We reviewed and discussed with Office of the Secretary of Defense and military department officials at the headquarters and major acquisition commands the department's plans, policies, and procedures for using performance-based logistics. We also collected policy and guidance (published and under development) by the Office of the Secretary of Defense as well as the military departments' policies and implementation plans. To assess what lessons could be drawn from the private sector companies' experiences to guide DOD's logistics support efforts, we interviewed DOD officials and reviewed ongoing logistics programs. We assessed the reliability of the projected cost and savings data we used in this report by reviewing supporting documentation and interviewing knowledgeable personnel; and we determined that it was sufficient for our purposes. We compared and contrasted the contract logistic approaches and practices used by private sector activities with those currently used by DOD and envisioned under its plans for implementing performance-based logistics. This comparison included such elements as the (1) use of performance- based contracting and the extent of its application, (2) assigning a single integrator for equipment or weapons system maintenance and logistics support on a platform level, (3) management and oversight including the importance of technical data, and (4) the degree of competitive sourcing and the importance of leveraging purchasing power. As part of our continuing review we are also conducting case studies on DOD performance-based logistics weapon systems to further compare the new DOD approach and practices with those of the private sector. This work is continuing and we expect to complete our final report early in 2005. We performed our work from September 2003 through June 2004 in accordance with generally accepted government auditing standards. We are sending copies of this report to the appropriate congressional committees, and it will be available at no charge on GAO's Web site at http://www.gao.gov. We are continuing with our review of performance- based logistics in the private sector and in DOD and plan to report the results early in 2005. If you or your staff have any questions on the matters discussed in this letter, please contact me at (202) 512-8412 or [email protected] or my assistant director, Julia Denman, at (202) 512-4290 or [email protected]. Larry Junek, Thom Barger, Pamela Valentine, Judith Collins, and Cheryl Weissman were major contributors to this report. 1. Only 7 of the 14 companies we interviewed use some type of performance-based contracting arrangements. None of the performance-based arrangements in the seven companies using them were at the platform level. 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The Department of Defense (DOD) is pursuing a policy that promotes performance-based logistics at the platform level as the preferred product support strategy for its weapon systems, based in part on DOD's perception that this is an industry best practice. GAO was asked to compare industry practices for activities using complex and costly equipment with life-cycle management issues similar to those of military systems to identify lessons learned that can be useful to DOD. This is the first of two reports addressing DOD's implementation of performance-based logistics and is intended to facilitate DOD's development of new guidance on the use of this approach. DOD's current policy for implementing performance-based logistics as a preferred support approach at the weapon system platform level does not reflect the practices of private-sector companies that support expensive and complex equipment with life-cycle management issues. The companies GAO interviewed use performance-based contracting as a tool rather than as a preferred support concept at the weapon system platform level. While 7 of the 14 companies GAO interviewed use some type of performance-based contracting, they use it at the subsystem or component level--for commodities such as engines, wheels, and brakes--when it is cost-effective and reduces risk in a noncompetitive environment. DOD's proposed policy of pursuing performance-based logistics as the preferred support approach at the platform level results in contracting out the program-integration function--a core process the private-sector firms consider integral to successful business operations. Further, this proposed policy could limit opportunities to take advantage of competition when it is available for subsystems or components as well as limit opportunities to gain purchasing power from volume discounts on components across an entire fleet and avoid the administrative costs charged by a prime integrator. While DOD is proposing the aggressive use of performance-based logistics on both older and new weapon system platforms, the companies GAO interviewed use performance-based contracting at the subsystem or component level when it is cost-effective--often in a noncompetitive environment when the manufacturer controls expensive repair parts, such as engines. In general company officials said they rely more widely on other contracting vehicles, such as time and material contracts, particularly for new systems. Company officials noted that in the absence of accurate and reliable information on system performance to establish a baseline for evaluating the cost-effectiveness of a performance-based contract for new systems, the risk of the negotiated price's being excessive is increased. The companies GAO interviewed also emphasized the importance of having rights to the technical data--such as maintenance drawings, specifications, and tolerances--needed to support the management of all logistics contracts and, should the service provider arrangements fail, to support competition among alternate providers. In contrast, DOD program managers often opt to spend limited acquisition dollars on increased weapon system capability rather than on rights to the technical data--thus limiting their flexibility to perform work in-house or to support alternate source development should contractual arrangements fail.

The IG Act originally established IGs appointed by the President and confirmed by the Senate in 12 major departments and agencies of the government in 1978. Since then, additional IGs have been added through a series of amendments to the IG Act. The Inspector General Act Amendments of 1988 established IGs appointed by their respective entity heads in designated federal entities (DFE) identified by the act with duties and responsibilities similar to those of IGs appointed by the President. DFEs are generally smaller agencies established in various statutes as commissions, boards, authorities, corporations, endowments, foundations, institutions, agencies, and administrations. Prior to the 1988 amendments, both GAO and the President's Council on Integrity and Efficiency, which preceded the Council of Inspectors General on Integrity and Efficiency (CIGIE), had found that the internal audit offices of small federal agencies lacked independence and provided inadequate coverage of important programs that could benefit from independent oversight by an IG. Additional criteria used by the Congress to determine where to establish these new IG offices included a budget threshold of at least $100 million for the DFEs. Specifically, those agencies with an annual budget of $100 million or greater were considered for inclusion in the 1988 amendments. However, other agencies below this budget threshold were also included for specific reasons. While the IGs in DFEs generally have the same authorities and responsibilities as those established by the 1978 IG Act, there is a clear distinction--they are appointed and removed by their agency heads rather than by the President and are not subject to Senate confirmation. The 1988 amendments established a new category of "federal entity," which is defined to exclude departments and agencies and DFEs with statutory IGs under the IG Act, as well as judicial and legislative branch entities and others as specified. Further, the 1988 amendments require the Office of Management and Budget (OMB), in consultation with GAO, to annually publish a list of (1) DFEs and, for DFEs that are not boards or commissions, their DFE heads and (2) the federal entities, as that term is defined by the IG Act. OMB's list of DFEs and federal entities is to be published annually in the Federal Register. The 1988 amendments also require that federal entities, which are defined to exclude entities with a statutory IG under the IG Act, report annually by October 31 to each House of the Congress and to OMB on, among other things, the audit and investigative activities in their respective organizations. GAO-11-770. GAO has long supported the creation of independent IG offices in appropriate federal departments, agencies, and entities, and we continue to believe that significant federal programs and entities should be subject to oversight by independent IGs. At the same time, we have reported some concerns about creating and maintaining small IG offices with limited resources, where an IG might not have the ability to obtain the technical skills and expertise needed to provide adequate and cost- effective oversight. In the final analysis, the determination of whether to place IGs in specific agencies is a policy decision to be decided by the Congress. As a result, we believe there are alternative approaches that the Congress may wish to consider to achieve IG oversight that is appropriate for federal agencies with relatively small budgets and resources. For example, we have recommended, on a case-by-case basis, that specific small agencies could benefit by obtaining IG oversight from another agency's IG office where the missions of the two agencies are somewhat similar. The following provides examples from our previously issued reports on alternatives suggested for IG oversight of small agencies. Export-Import Bank. In 2001, we were asked to review the need for an IG at the Export-Import Bank, which was defined by OMB as a federal entity under the IG Act, and was not subject to IG oversight. We found that the Export-Import Bank obtained an annual financial audit from an independent public accountant and received additional audits of administrative operations from its internal audit group. We also found that the Export-Import Bank had the largest budget of all other federal entities on OMB's list at the time, and that it was comparable in size to both departments and agencies with IGs appointed by the President and with DFEs with IGs appointed by the head of the DFE. The alternatives we provided for IG oversight of the Export-Import Bank included (1) establishing a new IG office through an amendment to the IG Act with an IG appointed by either the President or by the Export-Import Bank Chairman of the Board of Directors; (2) designating through legislation an existing IG office to provide oversight, such as the Agency for International Development IG; and (3) implementing a memorandum of understanding, which acts like a contract for outside IG services and would not require an amendment to the IG Act or other legislation. Subsequently, the Congress amended the IG Act in 2002 to establish a statutory IG for the Export-Import Bank, appointed by the President and confirmed by the Senate. Chemical Safety and Hazard Investigation Board (CSB). In 2008, we reported on the responsiveness of CSB to past IG recommendations. We concluded that after 10 years of operations, CSB continued to operate in noncompliance with its statutory mandates by not investigating all accidental chemical releases that involved a fatality, serious injury, or substantial property damage. Since fiscal year 2004, CSB had been obtaining IG oversight services from the Environmental Protection Agency (EPA) IG through a temporary statutory mandate included in its annual appropriation. However, because of the significant issues uncovered by our review, we provided for congressional consideration alternative oversight mechanisms that could be achieved either by amending CSB's authorizing statute or by amending the IG Act to permanently give the EPA IG the authority to serve as the oversight body for CSB and to provide appropriations and staff allocations specifically for the audit function of CSB through a direct line in the EPA appropriation. Alternatives such as allowing CSB to contract for its own oversight or create an internal audit and investigative unit were not considered as options because of the potential limitations of contracting in terms of both audit independence and the potentially limited duration of the contracting relationship and due to the limited staffing that could reasonably be allocated to an internal oversight function at an agency of its size. The EPA IG has reported continuing oversight efforts at CSB in recent semiannual reports to the Congress. National Mediation Board (NMB). In a recent example, our mandated review of the programs and management practices at NMB concluded in a 2013 report that the board is a small agency, but with a vital role in facilitating labor relations in the nation's railroads and airlines. We found that NMB's strategic plan lacked assurance that its limited resources were effectively targeted toward the highest priorities. In addition, NMB lacked certain internal controls that could help achieve results and minimize operational problems. We also concluded that in addition to the periodic oversight by GAO and the annual audits of NMB's financial statements by independent public accountants, an existing IG office assigned with the responsibility for providing ongoing audits and investigations of NMB and its operations would result in more effective oversight. We provided a matter for congressional consideration, which discussed the authorization of an appropriate federal agency's IG office to provide independent audit and investigative oversight of NMB. Foreign Affairs Reform and Restructuring Act of 1998, Pub. L. No. 105-277, div. G, SS 1314, 112 Stat. 2681-761, 2681-776-77 (Oct. 21, 1998), classified at 22 U.S.C SS 6533. Overseas Private Investment Corporation. Finally, the Department of Transportation IG is authorized to provide oversight of the National Transportation Safety Board. Independence is the cornerstone of professional auditing and one of the most important elements of an effective IG function. The IG Act provides specific protections to IG independence that are unprecedented for an audit and investigative function located within the organization being reviewed. These protections are necessary in large part because of the unusual reporting requirements of the IGs, who are subject to the general supervision of their agency heads and are also expected to provide independent reports of their work externally to the Congress. The IG Act provides the IGs with independence by authorizing them to select and employ their own staffs, make such investigations and reports as they deem necessary, and report the results of their work directly to the Congress. In addition, the IG Act provides the IGs with a right of access to information, and prohibits interference with IG audits or investigations by agency personnel. The act further provides the IGs with the duty to inform the Attorney General of suspected violations of federal criminal law. With the growing complexity of the federal government, the severity of the problems it faces, and the fiscal constraints under which it operates, it is important that an independent, objective, and reliable IG structure be in place where appropriate in the federal government to ensure adequate audit and investigative coverage. The IG Act provides each IG with the ability to exercise judgment in the use of independence protections specified in the act; therefore, the ultimate success or failure of an IG office is largely determined by the individual IG placed in that office and that person's ability to maintain independence both in fact and appearance. The Congress passed the IG Reform Act of 2008 (Reform Act) to further enhance IG independence and accountability. Among other provisions, the Reform Act requires the rate of basic pay of the IGs appointed by the President to be at a specified level, and for the DFE IGs, at or above that of a majority of other senior-level executives at their entities. The Reform Act also requires an IG to obtain legal advice from his or her own counsel or to obtain counsel from another IG office or from CIGIE. Additionally, the act provides a statutory process for handling allegations of wrongdoing by IGs so that such reviews are not done by the same management officials who are subject to IG oversight. The act also requires both the President and the DFE heads to give written reasons to the Congress for removing or transferring an IG at least 30 days prior to the action. The Reform Act also increased the visibility of the IGs' budgetary resources through the annual budget process. Specifically, the act requires that IG budget requests include certain information and be separately identified in the President's budget submission to the Congress. In addition, along with the separately identified IG budgets, an IG may include comments with respect to the budget if the amount of the IG budget submitted by the agency or the President would substantially inhibit the IG from performing the duties of the office. These budget provisions are intended to help ensure adequate funding and additional independence of IG budgets by providing the Congress with transparency into the funding of each agency's IG while not interfering with the agency head's or the President's right to formulate and transmit their own budget amounts for the IG. In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the IG Act with provisions to enhance the independence of IGs in DFEs with boards or commissions. Specifically, the Dodd-Frank Act changed who would be considered the head of certain DFEs for purposes of IG appointment, general supervision, and reporting under the IG Act. If the DFE has a board or commission, the IG Act now requires each of these IGs to report organizationally to the entire board or commission as the head of the DFE rather than an individual chairman. In addition, the IG Act requires the written concurrence of a two-thirds majority of the board or commission to remove an IG. Prior to this protection, most DFE IGs reported to, and were subject to removal by, the individual serving as head of the DFE. In other past legislative reforms, the Congress has taken actions to convert IGs from appointment by the agency heads to appointment by the President with Senate confirmation as a way to enhance IG independence. For example, on the heels of the savings and loan and banking crisis over two decades ago, the role of the Federal Deposit Insurance Corporation's (FDIC) IG became increasingly important in providing oversight. Because of the perceived limitation of the FDIC IG's independence resulting from agency appointment, the Congress converted the IG from agency appointment to appointment by the President with Senate confirmation. In another example, the Congress took action to convert the Tennessee Valley Authority (TVA) IG to appointment by the President with Senate confirmation because of concerns about interference by TVA management. In both cases, Congress recognized that the IG's independence would be enhanced by the presidential appointment. IGs play a critical role in federal oversight and we believe that all significant federal programs and entities should be subject to oversight by IGs. We have supported the creation of additional IG offices and the enhancements to their independence by past legislation. However, we continue to have some concerns about creating and maintaining IG offices in relatively small federal agencies where it may not be cost- effective to obtain the skills and expertise needed to provide adequate oversight. We believe there are alternatives to creating additional IG offices that can be both effective and less costly. These alternatives for oversight should be decided on a case-by-case basis depending on the critical nature of the small agencies' missions and the risks identified that require increased oversight. Because the Congress relies on the IGs to provide current information about their respective agencies' programs and activities, the determination of where and how to provide IG oversight in specific agencies is a policy decision addressed best by the Congress. This concludes my formal statement. Chairman McCaskill, Ranking Member Johnson, and Members of the Subcommittee, I would be pleased to answer any questions that you or the Subcommittee members may have at this time. If you or your staff have any questions about this testimony, please contact me at (202) 512-2623 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Jackson Hufnagle (Assistant Director), Lauren S. Fassler, Gregory Marchand, Taya Tasse, and Clarence Whitt. 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 IGs play a key role in federal agency oversight by enhancing government accountability and protecting the government's resources. This includes a strong leadership role in making recommendations to improve the effectiveness and efficiency of government offices and programs at a time when they are needed most. This testimony focuses on (1) the creation of independent IG offices, (2) IG oversight of small agencies, and (3) IG independence and budgetary resources. This testimony provides updates of current IG responsibilities; provisions of the IG Act, as amended; and draws on prior GAO reports and testimonies conducted in accordance with GAO's Quality Assurance Framework. GAO has made numerous observations and provided matters for the Congress to consider in prior reports when addressing IG oversight at small federal agencies and IG independence. The Inspector General Act of 1978, as amended (IG Act), originally established inspectors general (IG) appointed by the President and confirmed by the Senate in 12 major departments and agencies of the government to conduct and supervise independent audits and investigations; recommend policies to promote economy, efficiency, and effectiveness; and prevent and detect fraud and abuse in their departments' and agencies' programs and operations. Based in part on GAO's findings that the internal audit offices of small federal agencies lacked independence and provided inadequate coverage of important programs, the Congress passed the IG Act Amendments of 1988 to establish IGs in designated federal entities (DFE), which are generally smaller agencies established in various statutes as commissions, boards, authorities, corporations, endowments, foundations, institutions, agencies, and administrations identified by the act. The DFE IGs are appointed by their respective entity heads with duties and responsibilities similar to those of IGs appointed by the President. The Congress used a budget threshold of $100 million to help determine which DFEs should have IGs. However, additional DFEs below this threshold were also included for specific reasons. Significant federal programs and agencies should be subject to oversight by independent IGs; however, small IG offices with limited resources might not have the ability to obtain the technical skills and expertise needed to provide adequate, cost-effective oversight. GAO has previously found that alternative approaches exist to achieve IG oversight that may be appropriate for federal agencies with small budgets and few resources. For example, GAO has recommended on a case-by-case basis that specific small agencies could benefit by obtaining IG oversight from another agency's IG office where the missions of the two agencies are somewhat similar. Independence is one of the most important elements of an effective IG function. The IG Act, as amended, provides specific protections to IG independence. The IG Reform Act of 2008 further enhanced the IGs' independence by providing specified pay levels, IG legal counsel, a process for handling allegations of IG wrong-doing, and required notification to the Congress before an IG is removed or transferred. The IG Reform Act also requires the IGs' budget requests to be visible in the budget of the U.S. government submitted by the President to the Congress. Additional provisions to enhance the independence of IGs in DFEs with boards or commissions were included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Specifically, these IGs are to report organizationally to the entire board or commission rather than a single chairperson. In addition, the IG Act requires a two-thirds majority of the board or commission to remove the IG.

The use of SSNs by government and the private sector has grown over time, in part because of federal requirements. In addition, the growth in computerized records has further increased reliance on SSNs. This growth in use and availability of the SSN is important because SSNs are often one of the "identifiers" of choice among identity thieves. Although no single federal law regulates the use and disclosure of SSNs by governments, when federal government agencies use them, several federal laws limit the use and disclosure of the number. Also, state laws may impose restrictions on SSN use and disclosure, and they vary from state to state. Moreover, some records that contain SSNs are considered part of the public record and, as such, are routinely made available to the public for review. Since the creation of the SSN, the number of federal agencies and others that rely on it has grown beyond the original intended purpose. In 1936, the Social Security Administration (SSA) created a numbering system designed to provide a unique identifier, the SSN, to each individual. The agency uses SSNs to track workers' earnings and eligibility for Social Security benefits, and as of December 1998, SSA had issued 391 million SSNs. Since the creation of the SSN, other entities in both the public and private sectors have begun using SSNs, in part because of federal requirements. 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. (See appendix I for examples of federal laws that authorize or mandate the collection and use of SSNs.) In addition, private businesses, such as financial institutions and health care service providers, also rely on individuals SSNs. In some cases, they require the SSN to comply with federal laws but, at other times, they routinely choose to use the SSNs to conduct business. In addition, the advent of computerized records further increased reliance on SSNs. Government entities are beginning to make their records electronically available over the Internet. Moreover, the Government Paperwork Elimination Act of 1998 requires that, where practicable, federal agencies provide by 2003 for the option of the electronic maintenance, submission, or disclosure of information. State government agencies have also initiated Web sites to address electronic government initiatives. Moreover, continuing advances in computer technology and the ready availability of computerized data have spurred the growth of new business activities that involve the compilation of vast amounts of personal information about members of the public, including SSNs, that businesses sell. The overall growth in the use of SSNs is important to individual SSN holders because these numbers, along with names and birth certificates, are among the three personal identifiers most often sought by identity thieves. Identity theft is a crime that can affect all Americans. It occurs when an individual steals another individual's personal identifying information and uses it fraudulently. For example, SSNs and other personal information are used to fraudulently obtain credit cards, open utility accounts, access existing financial accounts, commit bank fraud, file false tax returns, and falsely obtain employment and government benefits. SSNs play an important role in identity theft because they are used as breeder information to create additional false identification documents, such as drivers licenses. Recent statistics collected by federal and consumer reporting agencies indicate that the incidence of identity theft appears to be growing. The Federal Trade Commission (FTC), the agency responsible for tracking identity theft, reports that complaint calls from possible victims of identity theft grew from about 445 calls per week in November 1999, when it began collecting this information, to about 3,000 calls per week by December 2001. However, FTC noted that this increase in calls might also, in part, reflect enhanced consumer awareness. In addition, SSA's Office of the Inspector General, which operates a fraud hotline, reports that allegations of SSN misuse increased from about 11,000 in fiscal year 1998 to more than 65,200 in fiscal year 2001. However, some of the reported increase may be a result of a growth in the number of staff SSA assigned to field calls to the Fraud Hotline during this period. SSA staff increased from 11 to over 50 during this period, which allowed personnel to answer more calls. Also, officials from two of the three national consumer reporting agencies report an increase in the number of 7 year fraud alerts placed on consumer credit files, which they consider to be reliable indicators of the incidence of identity theft. Finally, it is difficult to determine how many individuals are prosecuted for identity theft because law enforcement entities report that identity theft is almost always a component of other crimes, such as bank fraud or credit card fraud, and may be prosecuted under the statutes covering those crimes. Most often, identity thieves use SSNs belonging to real people rather than making one up; however, on the basis of a review of identify theft reports, victims usually (75 percent of the time) did not know where or how the thieves got their personal information. In the 25 percent of the time when the source was known, the personal information, including SSNs, usually was obtained illegally. In these cases, identity thieves most often gained access to this personal information by taking advantage of an existing relationship with the victim. The next most common means of gaining access were by stealing information from purses, wallets, or the mail. In addition, individuals can also obtain SSNs from their workplace and use them themselves or sell them to others. Finally, SSNs and other identifying information can be obtained legally through Internet sites maintained by both the public and private sectors and from records routinely made available to the public by government entities and courts. Because the sources of identity theft cannot be more accurately pinpointed, it is not possible at this time to determine the extent to which the government's use of SSNs contributes to this problem as compared to use of SSNs by the private sector. No single federal law regulates the overall use or restricts the disclosure of SSNs by governments; however, a number of laws limit SSN use in specific circumstances. Generally, the federal government's overall use and disclosure of SSNs are restricted under the Freedom of Information Act and the Privacy Act. The Freedom of Information Act presumes federal government records are available upon formal request, but exempts certain personal information, such as SSNs. The purpose of the Privacy Act, broadly speaking, is 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 by federal agencies. Also, the Social Security Act Amendments of 1990 provide some limits on disclosure, and these limits apply to state and local governments as well. In addition, a number of federal statutes impose certain restrictions on SSN use and disclosure for specific programs or activities. At the state and county level, each state may have its own statutes addressing the public's access to government records and privacy matters; therefore, states may vary in terms of the restrictions they impose on SSN use and disclosure. In addition, a number of laws provide protection for sensitive information, such as SSNs, when maintained in computer systems and other government records. Most recently, the Government Information Security Reform provisions of the Fiscal Year 2001 Defense Authorization Act require that federal agencies take specific measures to safeguard computer systems that may contain SSNs. For example, federal agencies must develop an agency-wide information security management program. These laws do not apply to state and local governments; however, in some cases state and local governments have developed their own statutes or put requirements in place to similarly safeguard sensitive information, including SSNs, kept in their computer systems. In addition to the SSNs used by program agencies to provide benefits or services, some records that contain SSNs are considered part of the public record and, as such, are routinely made available to the public for review. This is particularly true at the state and county level. Generally, state law governs whether and under what circumstances these records are made available to the public, and they vary from state to state. They may be made available for a number of reasons. These include the presumption that citizens need government information to assist in oversight and ensure that government is accountable to the people. Certain records maintained by federal, state, and county courts are also routinely made available to the public. In principle, these records are open to aid in preserving the integrity of the judicial process and to enhance the public trust and confidence in the judicial process. At the federal level, access to court documents generally has its grounding in common law and constitutional principles. In some cases, public access is also required by statute, as is the case for papers filed in a bankruptcy proceeding. As with federal courts, requirements regarding access to state and local court records may have a state common law or constitutional basis or may be based on state laws. When federal, state, and county government agencies administer programs that deliver services and benefits to the public, they rely extensively on the SSNs of those receiving the benefits and services. SSNs provide a quick and efficient means of managing records and are used to conduct research and program evaluation. In addition, they are particularly useful when agencies share information with others to verify the eligibility of benefit applicants or to collect outstanding debts. Using SSNs for these purposes can save the government and taxpayers hundreds of millions of dollars each year. As they make this wide use of SSNs, government agencies are taking some steps to safeguard the numbers; however, certain key measures that could help protect SSNs are not uniformly in place at any level of government. First, when requesting SSNs, government agencies are not consistently providing individuals with key information mandated by federal law, such as whether individuals are required to provide their SSNs. Second, although agencies that use SSNs to provide benefits and services are taking steps to safeguard them from improper disclosure, our survey identified potential weaknesses in the security of information systems at all levels of government. Similarly, sometimes government agencies display SSNs on documents not intended for the public, and we found numerous examples of actions taken to limit the presence of SSNs on documents. However, these changes are not systematic and many government agencies continue to display SSNs on a variety of documents. Most of the agencies we surveyed at all levels of government reported using SSNs extensively to administer their programs. As shown in table 1, more agencies reported using SSNs for internal administrative purposes, such as using SSNs to identify, retrieve, and update their records, than for any other purpose. SSNs are so widely used for this purpose, in part, because each number is unique to an individual and does not change, unlike some other personal identifying information, such as names and addresses. Many agencies also use SSNs to share information with other entities to bolster the integrity of the programs they administer. For example, the majority of agencies at all three levels of government reported sharing information containing SSNs for the purpose of verifying an applicant's eligibility for services or benefits. Agencies use applicants' SSNs to match the information they provide with information in other data bases, such as other federal benefit paying agencies, state unemployment agencies, the Internal Revenue Service, or employers. As unique identifiers, SSNs help ensure that the agency is matching information on the correct person. Also, some agencies at each level of government reported sharing data containing SSNs to collect debts owed them. Using SSNs for these purposes can save the government and taxpayers hundreds of millions of dollars, such as when SSA matched its data on Supplemental Security Income recipients with state and local correctional facilities to identify prisoners who were no longer eligible for benefits. Doing so helped identify more than $150 million in Supplemental Security Income overpayments and prevented improper payments of more than $170 million over an 8-month period. Finally, SSNs along with other program data, are sometimes used for statistical programs, research, and evaluation, in part because they provide government agencies and others with an effective mechanism for linking data on program participation with data from other sources. When government agencies that administer programs share records containing individuals' SSNs with other entities, they are most likely to share them with other government agencies. After that, the largest percentage of federal and state program agencies report sharing SSNs with contractors (54 and 39 percent respectively), and a relatively large percentage of county program agencies report sharing with contractors as well (28 percent). Agencies across all levels of government use contractors to help them fulfill their program responsibilities, such as determining eligibility for services and conducting data processing activities. In addition to sharing SSNs with contractors, government agencies also share SSNs with private businesses, such as credit bureaus and insurance companies, as well as debt collection agencies, researchers, and, to a lesser extent, with private investigators. In addition, all government personnel departments we surveyed reported using their employees' SSNs to fulfill at least some of their responsibilities as employers. Aside from requiring that employers report on their employees' wages to SSA, federal law also requires that states maintain employers' reports of newly hired employees identified by SSN. The national database is used by state child support agencies to locate parents who are delinquent in child support payments. In addition, employers responding to our survey said they use SSNs to help them maintain internal records and provide employee benefits. To provide these benefits, employers often share data on employees with other entities, such as health care providers or pension plan administrators. When a government agency requests an individual's SSN, the individual needs certain information to make an informed decision about whether to provide their SSN to the government agency or not. Accordingly, section 7 of the Privacy Act requires that any federal, state, or local government agency, when requesting an SSN from an individual, provide that individual with three key pieces of information. Government entities must tell individuals whether disclosing their SSNs is mandatory or voluntary; cite the statutory or other authority under which the request is being state what uses government will make of the individual's SSN. This information, which helps the individual make an informed decision, is the first line of defense against improper use. Although nearly all government entities we surveyed collect and use SSNs for a variety of reasons, many of these entities reported they do not provide individuals the information required under section 7 of the Privacy Act when requesting their SSNs. Federal agencies were more likely to report that they provided the required information to individuals when requesting their SSNs than were states or local government agencies. Even so, federal agencies did not consistently provide this required information; 32 percent did not inform individuals of the statutory authority for requesting the SSN and 21 percent of federal agencies reported that they did not inform individuals of how their SSNs would be used. At the state level, about half of the respondents reported providing individuals with the required information, and at the county level, about 40 percent of the respondents reported doing so. When government agencies collect and use SSNs as an essential component of their operations, they need to take steps to mitigate the risk of individuals gaining unauthorized access to SSNs or making improper disclosure or use of SSNs. Over 90 percent of our survey respondents reported using both hard copy and electronic records containing SSNs when conducting their program activities. When using electronic media, many employ personal computers linked to computer networks to store and process the information they collect. This extensive use of SSNs, as well as the various ways in which SSNs are stored and accessed or shared, increase the risks to individuals' privacy and make it both important and challenging for agencies to take steps to safeguard these SSNs. No uniform guidelines specify what actions governments should take to safeguard personal information that includes SSNs. However, to gain a better understanding of whether agencies had measures in place to safeguard SSNs, we selected eight commonly used practices found in information security programs, and we surveyed the federal, state, and county programs and agencies on their use of these eight practices. Responses to our survey indicate that agencies that administer programs at all levels of government are taking some steps to safeguard SSNs; however, potential weaknesses exist at all levels. Many survey respondents reported adopting some of the practices; however, none of the eight practices were uniformly adopted at any level of government. In general, when compared to state and county government agencies, a higher percentage of federal agencies reported using most of the eight practices. However, despite the federal government's self-reported more frequent use of these practices relative to the state and counties, it is important to note that since 1996 we have consistently identified significant information security weaknesses across the federal government. We are not aware of a comparable comprehensive assessments of information security for either state or county government. (For additional information on the eight practices we selected and how they fit into the federal framework for an information security program, see appendix II.) Further, when SSNs are passed from a government agency to another entity, agencies need to take additional steps to continue protections for sensitive personal information that includes SSNs, such as imposing restrictions on the entities to help ensure that the SSNs are safeguarded.Responses to our survey indicate that, when sharing such sensitive information, most agencies reported requiring those receiving personal data to restrict access to and disclosure of records containing SSNs to authorized persons and to keep records in secured locations. However, fewer agencies reported having provisions in place to oversee or enforce compliance with these requirements. In the course of delivering their services or benefits, many government agencies occasionally display SSNs on documents that may be viewed by others, some of whom may not have a need for this personal information. These documents include payroll checks, vouchers for tax credits for childcare, travel orders, and authorization for training outside of the agency. Also, some personnel departments reported displaying employees' SSNs on their employee badges (27 percent of federal respondents, 5 percent of state, and 9 percent of county). Notably, the Department of Defense (DOD), which has over 2.9 million military and civilian personnel, displays SSNs on its military and civilian identification cards. On the state level, the Department of Criminal Justice in one state, which has about 40,000 employees, displays SSNs on all employee identification cards. According to department officials, some of their employees have taken actions such as taping over their SSNs so that prison inmates and others cannot view this personal information. SSNs are also displayed on documents that are not employee-related. For example, some benefit programs display the SSN on the benefit checks and eligibility cards, and over one-third of federal respondents reported including the SSN on official letters mailed to participants. Further, some state institutions of higher education display students' SSNs on identification cards. Finally, SSNs are sometimes displayed on business permits that must be posted in public view at an individual's place of business. In addition to these examples of SSN display, we also identified a number of instances where the Congress or governmental entities have taken or are considering action to reduce the presence of SSNs on documents that may be viewed by others. For example, the DOD commissary stopped requiring SSNs on checks written by members because of concerns about improper use of the SSNs and identity theft. Also, a state comptroller's office changed its procedures so that it now offers vendors the option of not displaying SSNs on their business permits. Finally, some states have passed laws prohibiting the use of SSNs as a student identification number. These efforts to reduce display suggest a growing awareness that SSNs are private information, and the risk to the individual of placing an SSN on a document that others can see may be greater than the benefit to the agency of using the SSN in this manner. However, despite this growing awareness and the actions cited above, many government agencies continue to display SSNs on a variety of documents that can be seen by others. Regarding public records, many of the state and county agencies responding to our survey reported maintaining records that contain SSNs; however federal program agencies maintain public records less frequently. At the state and county levels, certain offices, such as state licensing agencies and county recorders' offices, have traditionally been repositories for public records that may contain SSNs. In addition, courts at all three levels of government maintain public records that may contain SSNs. Officials who maintain these records told us their responsibility is to preserve the integrity of the record rather than protect the privacy of the individual SSN holder. However, we found examples of some government entities that are trying innovative approaches to protect the SSNs in such records from public display. Moreover, the general public has traditionally gained access to public records by visiting the office that maintains the records, an inconvenience that represents a practical limitation on the volume of SSNs any one person can collect. However, the growth of electronic record-keeping places new pressures on agencies to provide their data to the pubic on the Internet. Although few entities report currently making public records containing SSNs available on the Internet, several officials told us they are considering expanding the volume and type of such records available on their Web site. This would create new opportunities for gathering SSNs on a broader scale. Again, some entities are considering alternatives to making SSNs available on such a wide scale, while others are not. As shown in table 2, more than two-thirds of the courts, county recorders, and state licensing agencies that reported maintaining public records reported that these records contained SSNs. In addition, some program agencies also reported maintaining public records that contain SSNs. County clerks or recorders (hereinafter referred to as recorders) and certain state agencies often maintain records that contain SSNs because these offices have traditionally been the repository for key information that, among other things, chronicles various life events and other activities of individuals as they interact with government. SSNs appear in these public records for a number of reasons. They may already be a part of a document that is submitted to a recorder for official preservation. For example, military veterans are encouraged to file their discharge papers, which contain SSNs, with their local recorder's office to establish a readily available record of their military service. Also, documents that record financial transactions, such as tax liens and property settlements, contain SSNs to help identify the correct individual. In other cases, government officials are required by law to collect SSNs. For example, to aid in locating non-custodial parents who are delinquent in their child support payments, the federal Personal Responsibility and Work Opportunity Reconciliation Act of 1996 requires that states have laws in effect to collect SSNs on applications for marriage, professional, and occupational licenses. Moreover, some state laws allow government entities to collect SSNs on voter registries to help avoid duplicate registrations. Although the law requires public entities to collect the SSN as part of these activities, this does not necessarily mean that the SSNs always must be placed on the document that becomes part of the public record. Courts at all three levels of government also collect and maintain records that are routinely made available to the public. Court records overall are presumed to be public; however, each court may have its own rules or practices governing the release of information. As with recorders, SSNs appear in court documents for a variety of reasons. In many cases, SSNs are already a part of documents that are submitted by attorneys or individuals. These documents could be submitted as part of the evidence for a proceeding or could be included in documents, such as a petition for an action, a judgment or a divorce decree. In other cases, courts include SSNs on documents they and other government officials create, such as criminal summonses, arrest warrants, and judgments, to increase the likelihood that the correct individual is affected (i.e. to avoid arresting the wrong John Smith). In some cases federal law requires that SSNs be placed in certain records that courts maintain, such as records pertaining to child support orders, divorce decrees, and paternity determinations. Again, this assists child support enforcement agencies in efforts to help parents collect money that is owed to them. These documents may also be maintained at county clerk or recorders' offices. When federal, state, or county entities, including courts, maintain public records, they are generally prohibited from altering the formal documents. Officials told us that their primary and mandated interest is in preserving the integrity of the record rather than protecting the privacy of the individual named in the record. Officials told us they believe they have no choice but to accept the documents with the SSNs and fulfill the responsibility of their office by making them available to the general public. When creating public documents or records, such as marriage licenses, some government agencies are trying new innovative approaches that protect SSNs from public display. For example, some have developed alternative types of forms to keep SSNs and other personal information separate from the portion of a document that is accessible to the general public. Changing how the information is captured on the form itself can help solve the dilemma of many county recorders who, because they are the official record keepers of the county, are usually not allowed to alter an original document after it is officially filed in their office. For example, a county recorder told us that Virginia recently changed its marriage license application so that the form is now in triplicate, and the copy that is available to the general public does not contain the SSN. However, an official told us even this seemingly simple change in the format of a document can be challenging because, in some cases, the forms used for certain transactions are prescribed by the state. In addition to these efforts at recorders offices, some courts have made efforts to protect SSNs in documents that the general public can access through court clerk offices. For example, one state court offers the option of filing a separate form containing the SSN that is kept separate from the part of the record that is available for public inspection. These solutions, however, are most effective when the recorder's office, state agencies, and courts prepare the documents themselves. In those many instances where others file the documents, such as individuals, attorneys, or financial institutions, the receiving agency has less control over what is contained in the document and, in many cases, must accept it as submitted. Officials told us that, in these cases, educating the individuals who submit the documents for the record may help to reduce the appearance of SSNs. This would include individuals, financial institutions, title companies, and attorneys, who could begin by considering whether SSNs are required on the documents they submit. It may be possible to limit the display of SSNs on some of these documents or, where SSNs are deemed necessary to help identify the subject of the documents, it may be possible to truncate the SSN to the last four digits. While the above options are available for public records created after an office institutes changes, fewer options exist to limit the availability of SSNs in records that have already been officially filed or created. One option is redacting or removing SSNs from documents before they are made available to the general public. In our fieldwork, we found instances where departments redact SSNs from copies of documents that are made available to the general public, but these tended to be situations where the volume of records and number of requests were minimal, such as in a small county. Most other officials told us redaction was not a practical alternative for public records their offices maintain. Although redaction would reduce the likelihood of SSNs being released to the general public, we were told it is time-consuming, labor intensive, difficult, and in some cases would require change in law. In documents filed by others outside of the office, SSNs do not appear in a uniform place and could appear many times throughout a document. In these cases, it is a particularly lengthy and labor-intensive process to find and redact SSNs. Moreover, redaction would be less effective in those offices where members of the general public can inspect and copy large numbers of documents without supervision from office staff. In these situations, officials told us that they could change their procedures for documents that they collect in the future, but it would be extremely difficult and expensive to redact SSNs on documents that have already been collected and filed. Traditionally, the public has been able to gain access to SSNs contained in public records by visiting the recorder's office, state office, or court house; however, the requirement to visit a physical location and request or search for information on a case-by-case basis offers some measure of protection against the widespread collection and use of others' SSNs from public records. Yet, this limited access to information in public records is not always the case. We found examples where members of the public can obtain easy access to larger volumes of documents containing SSNs. Some offices that maintain public records offer computer terminals on site where individuals can look up electronic files from a site-specific database. In one of the offices we visited, documents containing SSNs that were otherwise accessible to the public were also made available in bulk to certain groups. When asked about sharing information containing SSNs with other entities, a higher percentage of county recorders reported sharing information containing SSNs with marketing companies, collection agencies, credit bureaus, private investigators, and outside researchers. Finally, few agencies reported that they place records containing SSNs on their Internet sites; however, this practice may be growing. Of those agencies that reported having public records containing SSNs, only 3 percent of the state respondents and 9 percent of the county respondents reported that the public can access these documents on their Web site. In some cases, such as the federal courts, documents containing SSNs are available on the Internet only to paid subscribers. However, increasing numbers of departments are moving toward placing more information on the Internet. We spoke with several officials that described their goals for having records available electronically within the next few years. Providing this easy access of records potentially could increase the opportunity to obtain records that contain SSNs that otherwise would not have been obtained by visiting the government agency. While planning to place more information on the Internet, some courts and government agencies are examining their policies to decide whether SSNs should be made available on documents on their Web sites. In our fieldwork, we heard many discussions of this issue, which is particularly problematic for courts and recorders, who have a responsibility to make large volumes of documents accessible to the general public. On the one hand, officials told us placing their records on the Internet would simply facilitate the general public's ability to access the information. On the other hand, officials expressed concern that placing documents on the Internet would remove the natural deterrent of having to travel to the courthouse or recorder's office to obtain personal information on individuals. Again, we found examples where government entities are searching for ways to strike a balance. For example, the Judicial Conference of the United States recently released a statement on electronic case file availability and Internet use in federal courts. They recommended that documents in civil cases and bankruptcy cases should be made available electronically, but SSNs contained in the documents should be truncated to the last four digits. Also, we spoke to one county recorder's office that had recently put many of its documents on their Web site, but had decided not to include categories of documents that were known to contain SSNs. In addition, some states are taking action to limit the display of SSNs on the Internet. Given the likely growth of public information on the Internet, the time is right for some kind of forethought about the inherent risk posed by making SSNs and other personal information available through this venue. SSNs are widely used in all levels of government and play a central role in how government entities conduct their business. As unique identifiers, SSNs are used to help make record-keeping more efficient and are most useful when government entities share information about individuals with others outside their organization. The various benefits from sharing data help ensure that government agencies fulfill their mission and meet their obligation to the taxpayer by, for example, making sure that the programs serve only those eligible for services. However, the gaps in safeguarding SSNs that we have identified create the potential for SSN misuse. Although the extent to which the government's broad use of SSNs contributes to identity theft is not clear, measures to encourage governments to better secure and reduce the display of SSNs could at least help minimize the risk of SSN misuse. It is important to focus on ways to accomplish this. We will be reporting in more detail on these issues at the end of this month and look forward to exploring additional options to better protect SSNs with you as we complete our work. For further information regarding this testimony, please contact Barbara D. Bovbjerg, Director, or Kay E. Brown, Assistant Director, Education, Workforce, and Income Security at (202) 512-7215. Individuals making key contributions to this testimony include Lindsay Bach, Jeff Bernstein, Richard Burkard, Jacqueline Harpp, Daniel Hoy, Raun Lazier, Vernette Shaw, Jacquelyn Stewart, and Anne Welch.

The Social Security numbers (SSN), originally created in 1936 to track workers' earnings and eligibility for Social Security benefits is now used for many other purposes by both government and private sectors. The growth in electronic record keeping and the availability of information over the Internet, combined with the rise in identity theft, have heightened public concern about how their SSNs are being used. Federal agencies use SSNs to manage records, verify the eligibility of benefit applicants, collect outstanding debts, and do research and program evaluation. GAO found that federal laws designed to protect SSNs are not being followed consistently, Moreover, courts at all levels of government and offices at the state and county level maintain records that contain SSNs for the purpose of making these records available to the public. Recognizing that these SSNs may be misused, some government entities have taken steps to protect the SSNs from public display. At the same time, however, some government entities are considering making more public records available on the Intranet. Ease of access to electronically available files could encourage more information gathering from public records on a broader scale than possible previously.

Agencies communicate with the public for various reasons. In September 2016, we reported on categories of advertising and public relations activities that agencies may engage in, including: Public education and awareness - providing information on public health and safety issues, informing the public of its rights and entitlements, discouraging harmful or dangerous behavior; Customer service - providing information to users of agency General information - keeping the public informed of agency Recruitment - the process of attracting qualified applicants to apply Compliance with laws and policies - making information available in order to comply with statutes, executive orders, policies, and procedures. There are no single, commonly-accepted definitions of the terms "advertising," "public relations," or "public affairs." Advertising. Although federal guidance does not define "advertising" for purposes of classifying contracts, the Office of Management and Budget (OMB) defines the term in relation to determining costs for grants and other federal awards. OMB Circular A-87 defines "advertising costs" as "the costs of advertising media and corollary administrative costs," and "advertising media" as including magazines, newspapers, radio and television, direct mail, exhibits, and electronic or computer transmittals. Public relations. OMB Circular A-87 defines "public relations" as "community relations and those activities dedicated to maintaining the image of the governmental unit or maintaining or promoting understanding and favorable relations with the community or public at large or any segment of the public." Public affairs. We have stated that "public affairs" involves "efforts to develop and disseminate information to the public to explain the activities of and the issues facing an organization." While agencies have flexibility to use a variety of approaches to communicate with and reach out to the public, there are some prohibitions on public relations activities. For example, appropriations acts and other provisions of law prohibit the use of appropriated funds for certain types of communications. Since 1951, appropriations acts have included provisions prohibiting agencies from using appropriations for unauthorized "publicity or propaganda." While Congress has not defined the meaning of such publicity or propaganda, we have recognized three types of activities that violate these prohibitions: (1) self-aggrandizement, (2) covert propaganda (defined as "communications such as editorials or other articles prepared by an agency or its contractors at the behest of the agency and circulated as the ostensible position of parties outside of the agency"), and (3) materials that are purely partisan in nature. Appropriations acts have also typically included provisions prohibiting the use of federal funding for certain grassroots lobbying. Typical language includes a prohibition against using appropriated funds for communications designed to support or defeat legislation pending before Congress, except in presentation to Congress itself. We have determined that in order for a violation to occur, there must be evidence of a clear appeal by the agency to the public to contact members of Congress in support of, or in opposition to, pending legislation. The four agencies we reviewed were selected, in part, for their different missions and interaction with the public. Table 1 summarizes each agency's mission. We previously reported that government-wide annual obligations for advertising and public relations contracts averaged close to $1 billion over fiscal years 2006 through 2015, with the Department of Defense responsible for about 60 percent of obligations for these contracts over the 10-year period. The four selected agencies obligated on average a combined amount of $19 million annually over the past 10 years for advertising and public relations contracts, though annual obligations amounts vary substantially from year to year. As shown in table 2, these agencies obligated annual amounts ranging from -$0.3 million (reflecting deobligations) to nearly $18 million. The four agencies employed from 7 to 114 public affairs employees as of the end of fiscal year 2016, as shown in table 3. We previously reported that the government-wide number of full-time permanent public affairs employees was about 5,000 in fiscal year 2014, with about 42 percent of these employees at the Department of Defense. At each of the agencies we reviewed, obligations were concentrated in a small number of advertising and public relations contracts. The activities supported by these contracts ranged from promoting agency initiatives to providing communications support services. Appendix II provides details on each agency's largest advertising and public relations contracts (in terms of obligations) over fiscal years 2012 through 2016. CFPB. CFPB's four largest advertising and public relations contracts represented nearly 70 percent of obligations for these contracts over fiscal years 2012 through 2016 ($22.6 million out of $32.8 million). These four contracts all focused on increasing general awareness of the tools and resources CFPB offers to the public to promote better financial decision making. Contract documentation linked the need for increasing general awareness of CFPB's tools and resources to CFPB's statutory responsibility to develop and implement initiatives intended to educate and empower consumers to make better financial decisions. According to CFPB officials, promoting awareness of CFPB's tools and the services it provides is intended to increase their use. In particular, research conducted by a CFPB contractor in 2015 showed that before CFPB's campaign to increase awareness of its tools and resources, awareness and use of these tools and resources had remained level over the prior two and a half years. Figure 1 shows an example of CFPB outreach promoting its tools and resources. FEMA. The largest of FEMA's advertising and public relations contracts represented just over 40 percent of all obligations for these contracts over fiscal years 2012 through 2016 ($8.7 million out of $20.7 million). This contract, and several others, supported the National Flood Insurance Program (NFIP). According to FEMA officials, part of its role in administering the NFIP involves public communications and advertising to encourage people to buy flood insurance to better prepare themselves for disaster. FEMA's other high-value contracts included ones for services promoting emergency preparedness, including those supporting the Ready campaign. The Ready campaign promotes preparedness for many types of emergencies, including hurricanes, extreme heat, and tornadoes. Figure 2 illustrates Ready campaign outreach related to extreme weather alerts. NASA. NASA's two largest advertising and public relations contracts represented just under half of all obligations for these contracts over fiscal years 2012 through 2016 ($7.6 million of $17.1 million). These two contracts, and other lesser-value ones, supported NASA's Communications Support Services Center. This center provides support services across the agency, such as developing products that support the agency's education and public outreach programs. According to NASA officials, the contracts are for services that are less efficient for NASA staff to perform or for which staff do not have the needed expertise. Figure 3 shows an example of NASA outreach illustrating a program to grow plants in space. USCIS. USCIS' two largest advertising and public relations contracts represented just over 90 percent of obligations for these services over fiscal years 2012 through 2016 ($18.1 million out of $19.8 million).These two contracts supported planning and developing media and educational messaging tools for the E-Verify and Systematic Alien Verification for Entitlements (SAVE) programs. E-Verify is an Internet-based system that allows businesses to confirm the eligibility of their employees to work in the United States. SAVE is a verification service for benefit-granting agencies to verify applicants' immigration or citizenship status. According to contract documentation, outreach on these programs aims to, among other things, increase understanding and use of these services. Figure 4 shows an example of USCIS outreach promoting a virtual assistant, which is one of the ways the agency interacts with those using or interested in its services. More broadly, most of the 68 contracts we reviewed focused on public education and awareness, general information, or both. Table 4 shows the frequency of the types of general activities supported by the contracts we reviewed at each agency. The contracts we reviewed also involved different types of tasks, including analysis, content creation, monitoring, distribution, planning, or technical or operational support. For example, planning activities include creating a media strategy with new or existing resources or conducting market research. Appendix II provides a description of these tasks and the frequencies with which they were included in contracts. Our review of position descriptions for public affairs employees across the selected agencies showed that these employees' duties also primarily supported educating and providing information to the public. Officials at the agencies we reviewed supported this by most commonly citing public education and awareness, followed by general information, as public affairs staff's primary activities. Of the 13 position descriptions we reviewed at various levels of responsibility, duties included: writing, editing, and analysis; communication planning and evaluation; disseminating information through various channels, including news media (wire services, radio, television, newspapers, and magazines), agency websites, and social media accounts; engaging with stakeholders, including those within and outside of managing relationships with media entities. In some cases, public affairs staff are involved in activities also supported by contracted services to provide information to the public. For example, FEMA's Ready campaign involved contributions from both public affairs staff and a contractor's staff. According to FEMA officials, public affairs staff responsibilities for the campaign included developing messages, responding to questions from the public, representing the campaign at outreach events, and tracking campaign efforts. The contractor's staff, on the other hand, provided coding for the website, developed public service announcements, and created social media graphics and videos. Officials told us that the decision to contract a service instead of using public affairs staff, or the level of involvement of public affairs staff, depends on the type of work and who is able to provide the service more efficiently. For example, a USCIS public affairs official told us that the agency contracts for services related to outreach in situations where contractual services will save time and money or result in higher quality, such as providing a daily delivery of news clippings and media references to the agency, and maintaining a media contact database that agency staff use for outreach. Additionally, a NASA public affairs official told us that the agency contracts for services that employees do not have the expertise to do. For example, NASA headquarters has a photo office that is staffed by contractors, and contractors operate the cameras for NASA's television station. In both cases, NASA officials told us they monitor the contractors. Advertising and public relations contracts do not necessarily capture all of the advertising and public relations activities carried out by the four case study agencies. As we reported previously, there are other product service codes aside from those related to advertising and public relations services that can encompass such activities. We did not focus on them because they may also include activities that are not related to public relations. Additionally, there is an element of subjectivity involved in selecting the appropriate product service code for a contract that may lead different people to appropriately select different codes for similar services. For example, three of the four agencies we reviewed had contracts for services to monitor media for references to them or their activities. Agencies coded these contracts as either advertising or public relations services. Alternatively, USCIS coded a contract for a digital broadcast monitoring service as "IT and Telecom - Other IT and Telecommunications." USCIS officials said that this coding was because the monitoring related to digital broadcasting. Similarly, staff aside from those classified under the public affairs occupational series may also be involved in public affairs activities. For example, the agencies we reviewed used other staff to support public affairs activities by performing tasks such as translating material into other languages, editing materials to ensure that they meet standards for readability, and developing and maintaining information technologies that support outreach. Additionally, officials at both FEMA and NASA told us that public engagement is an integral part of their agencies' activities, and that one could consider all of their employees to be involved in public affairs to some extent. The amounts the agencies we reviewed obligated to contracts coded as advertising or public relations services varied from year to year, though some agencies' obligations were more stable. As shown in figure 5, CFPB and FEMA had the most significant changes over the last 10 years. According to CFPB officials, the increase in CFPB obligations over time is due to standing up its operations. Officials told us that during fiscal years 2013 through 2015, they piloted campaigns and conducted research on outreach. The results of these pilot campaigns and research informed later outreach activities. Increases in fiscal years 2015 and 2016 were due primarily to two contracts that focused on increasing awareness of CFPB and the tools it offers consumers. CFPB officials told us that fiscal year 2016 obligations reflect full operations, and they expect future years' obligations to be more consistent. The changes in FEMA obligations over the past decade are due in large part to changes in three contracts related to supporting outreach and customer support services for the agency's National Flood Insurance Program (NFIP). For example, in fiscal year 2010, most of the agency's obligations for advertising and public relations services (about $12.5 million out of a total of $16.2 million) were for an integrated marketing, advertising, and public relations services contract for the NFIP. In fiscal year 2011, the amount obligated to that contract dropped to about $1 million. In fiscal year 2016, FEMA obligated about $8.7 million for another contract supporting the NFIP, which drove the sharp increase in obligations in that year. Officials said that the amounts obligated for outreach for the NFIP depend on the program's other priorities, such as flood hazard mapping, which FEMA does to assess flood risks and uses to inform the development of NFIP regulations and flood insurance requirements. At NASA and USCIS, obligations were relatively stable over the past decade. NASA officials said they expected obligations to remain consistent or even decline in the future, in anticipation of declining resources. USCIS officials also said they expect obligations to remain relatively level in the future, though they may increase marketing activities if E-Verify is mandated nationwide. Employment of public affairs employees at the agencies we reviewed increased over the past decade, but was relatively stable at NASA. Table 5 shows the changes in public affairs employees at these agencies from 2007 through 2016. CFPB, FEMA, and USCIS officials identified several factors that caused the increase in the number of public affairs staff they use, including changes in operations and staffing structure. CFPB officials told us that the increase from five to seven public affairs employees between fiscal years 2011 and 2016 was due to standing up operations from fiscal year 2011. According to officials, the number of public affairs staff in fiscal year 2016 represents the steady state of operations for these employees at CFPB. FEMA officials cited organizational and structural changes, the rise of digital media, increasing stakeholder engagement, and an increase in work volume and duties as the reasons for its increase in public affairs employment. For example, in fiscal year 2007, the Protection and National Preparedness Directorate, which included public affairs staff, moved to FEMA. A USCIS public affairs official attributed the increase in the number of public affairs staff to a focus on having a greater number of lower- level public affairs staff versus a smaller number of higher level staff. They said they have found this staffing model to be effective. A NASA public affairs official said that the stability in the agency's number of public affairs staff was due to the end of the space shuttle program in 2011, which reduced the public affairs workload, balanced by an increased focus on commercial cargo and crew flight, which in turn has increased the public affairs workload. The official told us he expects staffing to either remain stable or decline in future years as the agency manages resource constraints. Officials at three of the four agencies we reviewed identified increased use of digital media as a significant change over the past decade, and at all four agencies said that these platforms are their primary methods of outreach. While the increased popularity of these media represented a change for FEMA, NASA, and USCIS, officials at CFPB, which began operations in 2011, said that they have used digital media platforms since its beginning. All four agencies had websites and presences on multiple social media platforms, such as Facebook and Twitter. According to officials at the agencies we reviewed, the use of digital media has increased the reach of agency communications and changed the nature of these agencies' interactions with the public. FEMA officials emphasized the usefulness of these media in obtaining information from the public by gaining awareness of conditions during disasters. For example, FEMA guidance described how during Hurricane Sandy public affairs employees were able to use social media to obtain information about power outages, volunteering and donations, and concerns about the response efforts. A USCIS public affairs official also said that digital media have improved and changed the agency's reach. For example, USCIS has been working to provide customer service online by doing things like holding "office hours" on Twitter, during which Twitter users can post questions, which are answered by USCIS staff (see figure 6). The increased use of digital media has had mixed effects on resources at the agencies we reviewed. FEMA officials told us that they increased the number of public affairs staff in response to the increase and evolution of digital media and the public's reliance on it during major disasters. For example, officials said during the Louisiana Floods in 2016, monthly engagement (shares, reactions, and comments) on the agency's Facebook account increased to 49,000, compared to an average of 7,000 (see figure 7). NASA and USCIS officials said they have generally been able to adjust to the increased use of digital media using existing resources. For example, NASA officials told us that they focused on hiring new public affairs staff with expertise in these areas when hiring to fill open public affairs positions. They also trained public affairs staff in digital media skills and modified contracts to include more digital media tasks in place of more traditional ones. Although the agencies we reviewed used digital media to a large extent, they all continue to use more traditional media such as newspapers and radio. FEMA officials told us that some populations they are trying to reach do not have access to digital media, so they use a mix of media. For example, they have found that radio is an effective medium for reaching out to members of tribal nations. Officials also made the point that other media channels are important because, during a disaster, people may not be able to access digital media due to power loss or other connection failures. All of the agencies we reviewed identified performance indicators they use to assess the performance of outreach activities, including those supported by advertising and public relations contracts and public affairs staff. However, the type and extent of assessment depends on the types of outreach conducted. For example, all four agencies use web-based indicators when assessing digital outreach, including use of agency websites and social media accounts. Officials told us that digital media are well suited to performance measurement and offer richer analytical possibilities than more traditional media. Outreach types and related indicators are described below. Digital media: Agencies use web-based indicators when assessing digital outreach, including indicators of the number of people reached, such as number of visits to a website and click-through rates (a ratio showing how often people who see a digital advertisement end up clicking on it). Agencies also use indicators related to how engaged users are with the outreach materials, including bounce rates (the percentage of visitors to a particular website who navigate away from the site after viewing only one page), the length of time a user spends on a web page or watching a video, and the number of people who respond to or share a social media post. When assessing digital outreach, agency officials told us that they also consider data on the proportion of users who access websites from mobile versus desktop computers and the geographic location of users. Traditional media: Agencies use other indicators to evaluate the performance of outreach conducted through traditional media such as newspapers, radio, and television. For newspapers, these indicators included circulation and number of readers per copy. For radio and television, they included the number of listeners or viewers. Other types of outreach: In some cases, agencies designed indicators specific to more targeted outreach efforts. For example, CFPB has a program that involves working with libraries to provide websites, worksheets, guides, and other information to help with consumers' financial decisions. CFPB directed a contractor supporting this program to assess this outreach through pilot testing of a guidebook and job aids with partner libraries, and to capture and document libraries' feedback and consolidate recommendations to CFPB. CFPB also used focus groups, field input from stakeholders, and surveys to inform outreach efforts. Officials told us that obtaining qualitative information through such efforts requires more resources, but this information is extremely useful in assessing performance of CFPB outreach activities. In many cases, the agencies we reviewed identified quantitative and qualitative goals for their contract and employee activities. For example, one CFPB contract we reviewed included a goal of reaching 20 percent of the target audience (defined as adults ages 30-44 with household incomes between $35,000 and $125,000) at a frequency of five times per month. In another case, FEMA set a qualitative goal for a contract supporting the Ready campaign. The objectives of the contract included encouraging state and local governments to create localized efforts to encourage emergency preparedness. The agencies we reviewed all used performance information to assess services provided through advertising and public relations services contracts. The majority of the contracts we reviewed (43 out of 68) explicitly included an analysis component, which involved such actions as developing indicators, collecting quantitative data, or analyzing and reporting the effectiveness of outreach efforts. With the exception of NASA, each agency used contracts and public affairs staff to support a major outreach initiative. These agencies also assigned to contractors responsibility for supporting performance assessment of those initiatives. For example, USCIS contracts supporting education and outreach initiatives for the E-Verify and SAVE programs directed the contractors to develop performance indicators to analyze and assess the results of outreach efforts. Appendix II provides examples of how the agencies we reviewed assessed the performance of selected major initiatives. Agencies also assign responsibility to public affairs employees to assess the outreach activities they support. Position descriptions for public affairs staff at all four of the agencies we reviewed specifically included assessment of agency outreach activities. For example, a NASA public affairs official told us that public affairs staff are involved in reviewing data on how many people read certain features and analyzing the effects of releasing new information, such as photos taken from spacecraft. The agency's Internet manager, who is classified under the public affairs occupational series, supervises the review of analytic information. Officials at the agencies we reviewed told us that they use performance information to inform decisions about outreach activities. For example: FEMA officials told us that they use the results of emergency preparedness surveys to inform the focus of future advertising for the Ready campaign. In response to people reporting lack of time as a barrier to discussing emergency preparedness with family members, FEMA developed messages for its Ready initiative focused on working towards emergency preparedness while doing other daily tasks, such as driving to school or eating dinner. USCIS used a report summarizing lessons learned from fiscal year 2016 outreach about the E-Verify program to inform fiscal year 2017 outreach efforts. The report included an assessment of which efforts in fiscal year 2016 most successfully supported objectives such as building awareness of the program. It included performance indicators, such as the number of times an online advertisement is shown on a search result page or other site (impressions), and the number of times a person clicks on an on-line advertisement (clicks). The summary report recommended approaches for fiscal year 2017 based on lessons learned from fiscal year 2016 performance. Despite the usefulness of web-based indicators and other tools used to measure outreach activities, officials at the agencies we reviewed acknowledged some challenges in using them. The following are examples of challenges officials at our case study agencies identified: Lack of qualitative feedback: Officials at USCIS and CFPB told us that while they have access to several indicators related to performance of outreach (for example, number of visitors to a site or downloads of materials), these indicators are not the same as understanding whether and how information is being used. A USCIS public affairs official said that the agency has this challenge with outreach through both digital and traditional media. For example, USCIS staff have information on the circulation of a newspaper in which they have placed an advertisement, but without additional assessment, it is difficult for staff to know how or if someone used information in the advertisement or had a favorable impression of it. Difficulty measuring long-term effects: NASA officials told us that digital media offers the ability to get virtually immediate feedback on indicators such as the number of people reached, and that such information helps inform decisions and ensure they make sound investments. However, officials noted that it is more difficult to determine the long-term effects of outreach activities. For example, it would be difficult for NASA to determine whether its outreach aimed at schoolchildren led them to eventually pursue careers in science, technology, engineering, and math fields. Difficulty identifying factors that influence performance: FEMA officials told us that there are many variables that affect performance of digital media outreach, including the time of day or week, the specific content of the message, and other news topics or marketing campaigns occurring at the same time. They said they use the data to make decisions, but in some instances it is difficult to determine why outreach did not perform well. In our prior work on advertising at the Department of Defense, we reported similar challenges in measuring the impact of advertising on recruitment. We stated that determining the precise impact of advertising on outcomes in this case is inherently challenging, in part due to concurrent effects of external factors, such as the influence of family support and the availability of other career or educational activities. Difficulty performing in-depth assessments: Tools that allow for more in-depth assessments of outreach activities may require more resources than collecting web-based or other indicators does. For example, under the Paperwork Reduction Act (PRA), agencies must receive approval from OMB for surveys or other efforts that involve collecting data from the public. CFPB officials told us the approval process for collecting information from the public can be challenging because the outreach initiative that is the subject of the information collection often changes or may evolve in the time it takes to receive approval, which can take up to a year. In our 2010 report on opportunities to strengthen agencies' customer service efforts, we reported that in certain circumstances the PRA clearance process made obtaining customer input difficult because of the time it takes to obtain approval for surveys to collect customer input. In our 2014 report on customer service at selected agencies, we reported that use of the Fast Track process designed to speed OMB survey approval had varied among the agencies we reviewed and not led to significant improvements. Selected agencies have taken steps to address these challenges. For example, FEMA and CFPB have used focus groups or surveys to obtain richer information on whether and how people are using their outreach material. FEMA works with a contractor to administer surveys that provide data on how the public may be responding to the agency's outreach, such as the extent to which people have taken action to prepare for emergencies. Both agencies have worked with OMB to obtain approval for their information collections, despite the resources involved. CFPB officials told us the information obtained through these collections makes it worth the time and resources involved in the approval process. We provided a draft of this report to CFPB, DHS, and NASA for comment. CFPB and DHS provided technical comments, which we incorporated as appropriate. NASA did not have comments. As agreed with your staff, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Director of the Consumer Financial Protection Bureau, Acting Secretary of Homeland Security, Acting Administrator of the National Aeronautics and Space Administration, and interested congressional committees. 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) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Our objectives were to review (1) the activities that selected agencies conducted using advertising and public relations contracts and agency public affairs employees, and their purposes; (2) how the level of resources selected agencies devoted to these activities changed over the past decade and the factors that officials identified as affecting these changes; and (3) how selected agencies measured the results of these activities. To address our objectives, we selected four agencies for case study based on several factors. First, we focused on agencies with high total obligations for advertising and public relations contracts or high total numbers of public affairs employees relative to other agencies with similar characteristics, and/ or large changes in these numbers in recent years relative to other agencies with similar organizational structures (e.g. comparing component agencies). Of those agencies, we selected ones with differing missions and types of interactions with the public. We also considered input on the suitability of agencies for case illustration purposes from our staff with expertise in agencies' operations. The four selected agencies were the Consumer Financial Protection Bureau, Federal Emergency Management Agency, National Aeronautics and Space Administration, and U.S. Citizenship and Immigration Services. We previously reported that the Department of Defense (DOD) obligates more funding to advertising and public relations contracts, and employs more public affairs staff than any other agency. We did not include DOD in this review because we have recent work that examined advertising at that department. To identify the activities selected agencies conduct using advertising and public relations contracts and the purposes of these activities, we reviewed information on these contracts. Specifically, we used the Federal Procurement Data System-Next Generation (FPDS-NG) database to identify contracts at the selected agencies with values of $150,000 or more that were classified as advertising or public relations services over fiscal years 2012 through 2016. The FPDS-NG database captures information on the federal government's contract awards and obligations. It includes data for most federal contracts that have an estimated value of $3,000 or more. The four agencies we reviewed had a combined total of 68 contracts with these characteristics. These 68 contracts represented just over a quarter (68 out of 253) and almost 95 percent ($90.7 million of the $97.4 million) of all advertising and public relations contracts and related obligations at these agencies over this time period. To illustrate the types of general activities the 68 contracts supported, we analyzed statements of work and other documentation using a data collection instrument (DCI).We used the DCI to categorize key characteristics of the services described in the contract documentation, such as the purpose of the activities, media channels for each of the activities, the intended audiences of the outreach, and any references to agency statutes or missions. We also interviewed agency contracting and public affairs officials about activities supported by contracts. We also classified the contracts according to five categories that we identified in our earlier work: (1) public education and awareness; (2) customer service; (3) general information; (4) recruitment; and (5) compliance with laws and policies. To conduct our analysis, one analyst used the DCI to review and code each contract. Another analyst verified the coding. Finally, we shared our classification according to the five categories with agency public affairs officials to ensure concurrence. We assessed the reliability of FPDS-NG data by considering known strengths and weaknesses of the data based on our past work that used the database, and by comparing FPDS-NG data to information in contracts provided by agencies. We also reviewed a nongeneralizable sample of 18 contracts not coded as advertising or public relations services, but that appeared to include some activities related to these services. We identified these other contracts by searching FPDS-NG for contracts with (1) vendors that had received other contracts for advertising and public relations services, and (2) contract descriptions that used the terms "advertising" or "public relations." We determined that these data were sufficiently reliable for our purposes. To identify activities supported by public affairs staff, and their purposes, we analyzed employment data provided by agencies on employees classified under the Office of Personnel Management's (OPM) public affairs occupational series. We also reviewed position descriptions and other documents provided by agencies and interviewed agency public affairs officials who manage public relations activities to describe the organization and role of public affairs employees in public relations and advertising activities, and the purposes of those activities. We assessed the reliability of agency employment data by comparing it to OPM's Enterprise Human Resource Integration database--the primary government-wide source for information on federal employees--and determined that they were sufficiently reliable for our purposes. To review how the level of contract and staff resources at selected agencies has changed over the past decade and factors affecting these changes, we reviewed FPDS-NG data, including the total obligations of public relations and advertising contracts from fiscal years 2007 to 2016. We also analyzed employment data provided by agencies on the numbers of full-time permanent public affairs staff over fiscal years 2007 through 2016. We interviewed agency public affairs officials to discuss reasons for any changes, as well as descriptions of changes in the types of work performed. To review how selected agencies measure the results of activities supported by advertising and public relations contracts and public affairs staff, we reviewed agency performance information, including agency performance reports and reports describing specific outreach activities and campaigns. We also examined whether and how the contracts we reviewed involved performance measurement. We reviewed this information and interviewed agency public affairs officials to identify methods that agencies use to measure the effects of activities supported by these contracts and staff, any challenges that the agencies have with measuring their effects, and ways that agencies incorporate performance information into decision making. We conducted this performance audit from August 2016 to September 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. At the agencies we reviewed, a relatively small number of advertising and public relations contracts represented a large portion of total obligations to these contracts. The following figures and notes illustrate and describe each agency's largest contracts over fiscal years 2012 through 2016. Figure 8 shows Consumer Financial Protection Bureau (CFPB) obligations to its five largest and all other advertising and public relations contracts ("calls" or "task orders") over fiscal years 2012 through 2016. CFPB had a total of 44 advertising and public relations contracts ("calls" or "task orders") with combined obligations of $32.8 million over this time period. There may be multiple calls or task orders for a single contract. Figure 9 shows Federal Emergency Management Agency (FEMA) obligations to its five largest and all other advertising and public relations contracts over fiscal years 2012 through 2016. FEMA had a total of 148 of these contracts with a combined value of $20.7 million over this time period. National Aeronautics and Space Administration Figure 10 shows National Aeronautics and Space Administration (NASA) obligations to its five largest and all other advertising and public relations contracts over fiscal years 2012 through 2016. NASA had a total of 55 of these contracts with a combined value of $17.1 million over this time period. U.S. Citizenship and Immigration Services Figure 11 shows U.S. Citizenship and Immigration Services (USCIS) obligations to the four advertising and public relations contracts we reviewed. The agency had two other of these contracts over fiscal years 2012 through 2016, with a value of about $27,000 and -$100,000. Because the net value of these contracts is negative, we did not represent them in the figure. The contracts we reviewed involved different types of tasks. Table 6 lists and describes these tasks and provides examples from the agencies. Note that some contracts fell into two or more categories, as contracts may involve multiple types of services. Five of the six tasks (all except monitoring) were included in a majority of the contracts, and the three most frequent tasks were the three most closely related to distributing information (planning, content creation, and distribution). Planning activities often included conducting market research (of the 46 contracts that included planning, 31 included market research). Agencies asked contractors to create content for a variety of mediums. Of the 50 contracts that involved content creation, the most common tasks included were related to writing/editorial (37), graphic design (30), and video production (29), and the most common media were web/digital (38), and print (30). Agencies tasked contractors with distributing the information or buying media on a variety of platforms, but more often than not, did not include a specific medium in the contract. Of the 46 contracts that involved distribution, the most frequent method specified is through digital advertising (17). Table 7 shows examples of each agency's major outreach initiatives, as indicated by the advertising and public relations services contracts with the highest obligations, along with related performance measurement activities. High-value contracts at CFPB, FEMA, and USCIS focused on a particular outreach initiative or initiatives, while NASA's highest value contracts were for services that more generally supported outreach and other agency activities. Other GAO staff who made contributions to this report include Carol Henn (Assistant Director); Shari Brewster; Jenny Chanley; Cale Jones; Julia Kennon; Joshua Miller; Meredith Moles; Kathleen Padulchick; and Elise Vaughan Winfrey.

Agencies communicate with the public regarding their functions, policies, and activities. In September 2016, GAO reported that the federal government spends about $1.5 billion per year on public relations activities, carried out through advertising and public relations contracts and by public affairs employees. GAO was asked to describe the purposes and reported benefits of federal agencies' public relations investments. This report reviews (1) the activities selected agencies conducted using advertising and public relations contracts and public affairs employees, and their purposes; (2) how the level of resources the agencies devote to these activities has changed over the past decade and factors officials identified as affecting these changes; and (3) how the agencies measure results of these activities. GAO selected four case study agencies--CFPB, FEMA, NASA, and USCIS--based on factors including obligations for advertising and public relations contracts, numbers of public affairs employees, and agency missions and public interactions. GAO reviewed documentation for contracts valued at or over $150,000 from fiscal years 2012 through 2016; examined staff position descriptions, performance information, and employment data; and interviewed officials at these agencies. CFPB and the Department of Homeland Security provided technical comments on this report, which were incorporated as appropriate. NASA did not have comments. At the agencies GAO examined--the Consumer Financial Protection Bureau (CFPB), Federal Emergency Management Agency (FEMA), National Aeronautics and Space Administration (NASA), and U.S. Citizenship and Immigration Services (USCIS)--most of the advertising and public relations contracts GAO reviewed and public affairs staff responsibilities focused on informing and educating the public. These agencies' advertising and public relations contract obligations were concentrated in a small number of contracts that supported major agency initiatives and communications services. Specifically, CFPB: The four largest contracts ($22.6 million out of $32.8 million) focused on increasing public awareness of CFPB's tools and resources related to its statutory responsibility to educate and empower consumers to make better financial decisions. FEMA: The largest contract ($8.7 million out of $20.7 million) supported the National Flood Insurance Program (NFIP). The agency's role in administering the program includes advertising to encourage people to buy flood insurance. Other high-value contracts promoted emergency preparedness, including the Ready campaign. NASA: The two largest contracts ($7.6 million out of $17.1 million) supported NASA's Communications Support Services Center, which provides graphics and other services across the agency. USCIS: The two largest contracts ($18.1 million out of $19.8 million) were for outreach for two immigration-related eligibility verification systems--E-Verify and Systematic Alien Verification for Entitlements. Over the past decade, changes in advertising and public relations contract obligations and public affairs employees varied at the selected agencies due to changes in agency activities and increased use of digital media. For example, contract obligations were relatively stable at NASA and USCIS. CFPB, on the other hand, saw an increase in obligations due to ramping up operations from 2011, when the agency began operations. Variances in FEMA's obligations stemmed primarily from fluctuations in NFIP contracts due to changing priorities. The number of public affairs employees generally increased at the selected agencies, but was relatively stable at NASA. These increases were due to changes in operations and staffing structure. For example, USCIS changed its staffing model to add more lower-level public affairs staff. Officials at three of the four agencies we reviewed noted an increased use of digital media for public outreach, though the effects on contract and staff resources have been mixed. The agencies measured performance of their activities using web-based and other indicators, such as the number of website visits and length of time spent on a page, and reported using this information to inform decision making. However, agency officials identified challenges in measuring the performance of these activities, including a lack of qualitative data on whether and how information is being used. Selected agencies have taken some steps to address these challenges by, for example, administering surveys to obtain additional feedback.

Among other things, FSA is responsible for implementing USDA's direct and guaranteed loan programs. FSA's district office staff administer the direct loan program and have primary decision-making authority for approving loans. As of September 30, 2001, there were about 95,000 borrowers with direct loans outstanding, with an unpaid principal balance of about $8.5 billion. FSA farm loan managers are responsible for approving and servicing these loans. The factors FSA staff consider in approving or denying a loan include the applicant's eligibility, (i.e., he or she must operate a family-size farm in the area), credit rating, cash flow, collateral, and farming experience. Once a farm loan application is complete, FSA officials have 60 days to approve or deny the application and notify the applicant in writing of the decision. Once FSA approves a direct loan, it helps borrowers develop financial plans; collects loan payments; and, when necessary, restructures delinquent debt. Direct loans are considered delinquent when a payment is 30 days past due. When a borrower's account is 90 days past due, FSA county staff formally notify him or her of the delinquency and provide an application for restructuring the loan. To be considered for loan restructuring, borrowers must complete and return an application within 60 days. FSA staff process the completed application and notify borrowers whether they are eligible for loan restructuring. If a borrower does not apply or is not eligible for loan restructuring, and the loan continues to be delinquent, FSA notifies the borrower that it will take legal action to collect all the money owed on the loan (called loan acceleration). If the borrower does not take action to settle their account within a certain period of time, FSA may start foreclosure proceedings. When farmers believe that FSA has discriminated against them, they may file a discrimination complaint with USDA's OCR. For the complaint to be accepted, it must be filed in writing and signed by the complainant; be filed within 180 days of the discriminatory event; and describe the discriminatory conduct of a USDA employee or the discriminatory effect of a departmental policy, procedure, or regulation. Farmers may also seek compensation for violations of their civil rights by filing individual or class action lawsuits. In 1997, African-American farmers filed a class action against USDA (Pigford v. Glickman). In 1999, this suit resulted in a multimillion-dollar settlement agreement for the farmers. Since then, women and other minority farmers have also filed class actions against USDA. As you know, to elevate the attention of civil rights matters at USDA, the Congress created the position of Assistant Secretary of Agriculture for Civil Rights in the 2002 Farm Bill. In addition, in September of this year, the Secretary of Agriculture announced the creation of a new office within FSA to work with minority and socially disadvantaged farmers who have questions and concerns about loan applications filed with local offices. During fiscal year 2000 and 2001, the national average processing time for direct loans for Hispanic farmers was 20 days--4 days longer than for non- Hispanic farmers--but well within FSA's 60-day requirement. At the state level, loan processing time differences were more varied. For example, in the four states that account for over half of all Hispanic applications, processing times for Hispanic farmers were faster than for non-Hispanic farmers in three states and slower in the fourth state. However, all times fell well within FSA's 60-day requirement. Table 1 shows the average processing times of non-Hispanic and Hispanic farmers' applications nationwide and for the four states. The vast majority--91 percent--of all direct loan applications from Hispanic farmers were processed within FSA's 60-day requirement. However, the loan approval rate for Hispanic farmers was lower than for non-Hispanic farmers during this 2-year period: 83 and 90 percent, respectively. FSA officials maintain that approval rate differences were not significant and attribute them to differences in the applicants' ability to repay the loans they requested. Despite national differences, as shown in table 2, in three of the four states that received the largest number of Hispanic applications in fiscal year 2001, direct loan approval rates were similar. As part of FSA's assessment of its civil rights performance, the agency monitors differences between minority and nonminority loan processing times and approval rates at both the national and state levels. In addition, FSA sends teams to state offices to conduct civil rights reviews. The teams review loan files to verify compliance with FSA policies and procedures and, if warranted, provide written recommendations to remedy problems they find. Through fiscal year 2001, each state office was reviewed once every 3 years; beginning in fiscal year 2002, the offices will be reviewed every other year. While FSA monitors variations in loan processing times and approval rates for minorities and nonminorities, it does not have established criteria for determining when observed variations are significant enough to warrant further inquiry. In addition, while FSA conducts periodic field reviews of state offices' performance in civil rights matters and suggests improvements, it does not require the offices to implement the recommendations and does not monitor state office follow-up efforts. FSA is currently considering requiring state offices to provide information on how they have addressed weaknesses noted during reviews. USDA has a policy for issuing stays of foreclosure in cases when discrimination has been alleged in individual complaints filed with OCR, but not in response to individual or class action lawsuits with similar allegations. When an individual files an administrative discrimination complaint with OCR, FSA's policy is to automatically issue a stay of adverse action--including foreclosure-until the complaint has been resolved. During fiscal years 2000 and 2001, this policy was followed in 24 of the 26 applicable cases involving Hispanic borrowers. The policy was not followed in the remaining two cases because of miscommunication between OCR and FSA in reconciling their respective lists of complainants. When FSA learned that complaints had been filed with OCR, it stayed its foreclosure actions, and, as of August 2002, no further collection actions had been taken against the two farmers. Although future data system improvements should alleviate this problem, OCR and FSA officials acknowledge that improvements could be made in the interim. USDA does not have a similar policy for issuing stays related to discrimination claims raised in an individual or class action lawsuit. Instead, FSA makes decisions on whether to issue stays on a case-by-case basis based on the advice of USDA's General Counsel and the Department of Justice. Since 1997, USDA has issued stays of foreclosure related to African-American and Native American farmers' class action discrimination lawsuits involving FSA loan programs. In contrast, USDA did not issue stays of foreclosure for other class action discrimination lawsuits involving FSA loan programs because the department believed that the circumstances did not warrant a stay. These class action lawsuits and how USDA handled stays of foreclosure are discussed in greater detail below. In October 1997, African-American farmers filed a class action lawsuit against the Secretary of Agriculture (Pigford v. Glickman) alleging racial discrimination by USDA in its administration of federal farm programs. On October 9, 1998, the court certified the class--issued the criteria for class eligibility. On January 5, 1999, USDA entered into a 5-year consent decree with the claimants of the suit to settle it. The federal district court approved the consent decree and a framework for the settlement of individual claims in April of the same year. As of August 29, 2002, about 21,800 claims have been accepted for processing. As part of the consent decree, USDA agreed to refrain from foreclosing on real property owned by a claimant or accelerating their loan account.In November 1999, Native American farmers filed a class action lawsuit against the Secretary of Agriculture (Keepseagle v. Glickman) alleging that USDA willfully discriminated against Native American farmers and ranchers when processing applications for farm credit and farm programs. Further, claimants alleged that some class members had previously filed discrimination complaints with USDA and that the department had failed to thoroughly investigate the complaints. In December 1999, USDA issued a notice to FSA offices directing them not to accelerate or foreclose on any direct loans held by Native American borrowers unless the national office, with the concurrence of the Office of General Counsel, specifically authorized such action against an individual. As scheduled, this directive expired at the end of 2000. In October 2000, Hispanic farmers (Garcia v. Glickman) and women farmers (Love v. Glickman) each filed class action lawsuits against USDA alleging similar claims that USDA willfully discriminated against them in processing applications for farm credit and farm programs. Specifically, they alleged that loans were denied, provided late, or provided with less money than needed to adequately farm. In addition, the plaintiffs alleged that when they filed discrimination complaints about the handling of their loan applications, USDA failed to investigate them. The department has not issued stays of foreclosure in either of these lawsuits. In June 2001, USDA's Acting General Counsel wrote a memo that explained the department's reasoning for issuing stays of foreclosure in response to some class action lawsuits, but not others. According to the memo, the stay of foreclosure agreement included in the Pigford consent decree was reached only in the context of litigation and only to settle a lawsuit in which a class action had already been certified by the district court. The memo went on to say that the stay of foreclosure policy issued in response to the Keepseagle lawsuit was implemented during the infancy of the lawsuit while USDA and the Department of Justice were evaluating how to proceed in defending it. In addition, the memo stated that USDA did not intend to continue a stay of foreclosure beyond the evaluation. Further, the Acting General Counsel wrote that in all three of the pending lawsuits--Keepseagle, Garcia, and Love--no adequate factual bases had been alleged to support the claims of discrimination made by most of the named plaintiffs. As a result, the department saw no reason to implement a policy to halt foreclosures and other similar actions affecting borrowers potentially involved in these lawsuits. As of September 2002, a class has been certified for the Keepseagle lawsuit, but not for the Garcia suit. USDA has not issued any further stays of adverse action for participants in any of these lawsuits. Although USDA has not issued stays of foreclosure for potential class members in Garcia, relatively few Hispanic farmers have been affected by this decision. According to our survey of state offices, FSA accelerated the direct loans of almost 1,500 borrowers during fiscal years 2000 and 2001; only 41 of these borrowers were Hispanic. FSA also foreclosed on the loans of 6 of these 41 farmers during this period. In addition to these 41 borrowers, 10 other Hispanic borrowers who had their loans accelerated in prior years were foreclosed on during fiscal years 2000 and 2001. To put these figures into context, during this period, FSA foreclosed on the loans of approximately 600 borrowers, 16 (or 3 percent) of whom were Hispanic. During this period, Hispanic farmers made up about 4 percent of the agency's direct loan portfolio. FSA does not maintain historic information on accelerations or foreclosures in a manner for this information to be readily retrieved or analyzed. FSA officials acknowledged that such information is needed in light of the frequent charges of discrimination it faces. OCR has adopted many recommendations made in the past by USDA's Inspector General and agency task forces. For example, in 2000, a USDA task force identified 54 tasks to help address problems with OCR's organization and staffing, database management, and complaint processing. As of July 2002, the office had fully implemented 42, or nearly 80 percent, of these recommendations and plans to complete implementation of most of the others by October 2002. In addition, OCR has made some organizational modifications, such as creating separate employment and program directorates and adding three new divisions to the latter--Program Adjudication, Program Compliance, and Resource Management Staff. Further, from the beginning of fiscal year 2000 to the end of fiscal year 2001, OCR has made significant progress in reducing its inventory of complaints from 1,525 to 594. Despite these actions, however, OCR continues to fail to meet USDA's requirement that program complaints be processed in a timely manner. Specifically, USDA directs OCR to complete its investigative reports within 180 days after accepting a discrimination complaint. However, during fiscal years 2000 and 2001, OCR took on average 365 days and 315 days, respectively, to complete its investigative reports. Furthermore, as shown in figure 1, the 180-day requirement covers only a portion of the three major stages of the entire processing cycle. Accordingly, even if the 180- day requirement were met, OCR still take 2 years or more to complete the processing of a complaint. In fact, when all phases of the complaint resolution are accounted for, OCR took an average of 772 and 676 days in fiscal years 2000 and 2001, respectively, to completely process complaints through the entire complaint cycle and issue the final agency decision. OCR has made only modest progress in improving its timely processing of complaints because it has yet to address severe, underlying human capital problems. According to USDA officials, OCR has long-standing problems in obtaining and retaining staff with the right mix of skills. The retention problem is evidenced by the fact that only about two-thirds of the staff engaged in complaint processing in fiscal year 2000 were still on board 2 years later. OCR officials also pointed out that this staffing problem has been exacerbated because management and staff have been intermittently diverted from their day-to-day activities by such tasks as responding to requests for information from the courts. Furthermore, severe morale problems have exacerbated staff retention problems and have adversely affected the productivity of the remaining staff. Management officials told us that they spend an inordinate amount of time and resources addressing internal staff complaints. In fact, during fiscal years 2000 and 2001, OCR had one of the highest rates of employee- filed administrative complaints in the department. This atmosphere has led to frequent reassignments or resignations of OCR managers and staff. According to senior OCR officials, the problem has reached the point where some staff have even threatened fellow employees or sabotaged their work. Although OCR's Director believes that the situation has improved over the past few years, he acknowledges that some of the more serious morale problems have not been resolved. In conclusion, Mr. Chairman, USDA has continuously faced allegations of discrimination in its making direct loans to farmers over the past decade. To help guard against such charges, FSA needs to improve its monitoring and accountability mechanisms and make its systems and decision processes more consistent and transparent. Although FSA monitors variations in loan processing times and approval rates, it lacks criteria for determining when discrepancies warrant further inquiry. Similarly, while FSA conducts periodic reviews of its state offices' civil rights conduct and makes suggestions for improvement, it cannot ensure that these suggestions have been effective--or even adopted- without a requirement that state offices implement its recommendations or, if not, explain their reasons for not doing so. In addition, USDA has also been criticized for its handling of the allegations themselves--whether they were handled through litigation or the agency's complaint processes. In the case of class action lawsuits, USDA has been charged with treating different minority groups inequitably because it grants stays of foreclosures to some groups but not to others. Without a standard, transparent policy that lays out the factors USDA considers in deciding whether or not to issue stays, the department faces the continued problem of having its decisions viewed as unfair. Furthermore, if FSA and OCR do not improve their process for reconciling their respective lists of complainants, FSA runs the risk of violating its policy of not taking foreclosure actions against farmers with pending discrimination complaints. In addition, without maintaining historical information on foreclosures, USDA lacks an important tool to help it understand its equal opportunity performance.

For years, some minority and women farmers have alleged that the Department of Agriculture's (USDA) Farm Service Agency (FSA) discriminates against them, treating them differently from other farmers during the loan approval or foreclosure process. During fiscal years 2000 and 2001, FSA took, on average, four days longer to process loan applications from Hispanic farmers than it did for non-Hispanic farmers: 20 days versus 16 days. The FSA's direct loan approval rate was somewhat lower for Hispanic farmers than for non-Hispanic farmers nationwide: 83 and 90 percent, respectively. USDA's policies for staying foreclosures when discrimination has been alleged depend on the method used to lodge complaints. When an individual's discrimination complaint is accepted by the Office of Civil Rights (OCR), FSA's policy is to automatically issue a stay of adverse action, such as foreclosure, until the complaint has been resolved. OCR has made modest progress in the length of time it takes to process discrimination complaints. USDA requires OCR to complete the investigative phase of processing a complaint within 180 days of accepting it. In fiscal year 2000, OCR took an average of 365 days to complete just the investigative phase. Although OCR slightly improved this average to 315 days in fiscal year 2001, this continues to exceed the department's internal 180-day requirement.

To establish and manage its inventories, the Coast Guard must comply with the criteria contained in federal property management regulations and with the Department of Transportation's (DOT) policy. Federal property management regulations state that each agency shall establish and maintain control of inventories to ensure that total costs will be kept to a minimum consistent with the needs of the agency's programs. DOT's policy states that inventories will be established and maintained only when it is more costly to purchase items on a case-by-case basis or when the items are so critical that a delay in delivery would negatively affect an agency's mission. The policy also states that inventories must be managed in an effective manner to ensure that timely and adequate support is rendered and that optimum inventory levels are maintained. Within the Coast Guard, supply centers located at Curtis Bay and Baltimore, Maryland, stock about 18,000 different parts, including mechanical, electrical, radar, communication, computer, and hull items; these parts are valued at about $140 million. In addition, the Coast Guard authorizes each cutter to maintain a parts and supplies inventory that ranges in value from a few thousand dollars to over a million dollars, depending on the cutter's size, missions, and operating area. However, individual purchases are restricted to established price thresholds that vary, depending on the cutter's class; the thresholds range up to $5,000 for large cutters. (Table II.1 lists the 41 different classes of Coast Guard cutters.) For example, the cutters usually purchase such items as nuts and bolts, valves, seals, gaskets and other minor repair parts with their operating budgets. According to Coast Guard officials, about 55 percent of the cutters' parts and supplies are purchased directly from commercial contractors and about 45 percent are purchased from the federal supply system. The cutters' purchases from the federal supply system are divided between orders from the two Coast Guard supply centers and orders from other government agencies. Such other agencies as the Defense Logistics Agency; the Departments of the Army, Navy, and Air Force; and the General Services Administration fill about 90 percent of orders for parts from the federal supply system, while the Coast Guard's two supply centers in Maryland fill the remaining 10 percent. Since storage space is limited on most vessels, cutters also store some of their parts at individual onshore storage facilities, including movable storage in tractor trailers, as well as at typical warehouse-type buildings. The Coast Guard does not have the organizational structure or computer systems necessary to effectively manage its parts and supplies inventory for its cutters. As a result, the Coast Guard does not know the value, type, quantity, and condition of many of the spare and repair parts in the overall inventory. In addition, the Coast Guard does not know whether cutters have a shortage or an excess of parts or whether the parts are available when needed. Management responsibilities for buying, storing, issuing, and tracking parts and supplies in the Coast Guard's inventories are spread across various internal and external organizations. For example, the Maintenance and Logistics Commands at Alameda, California, and Governors Island, New York, manage the parts used during overhauls of cutters; the Coast Guard's two supply centers in Maryland manage the unique parts needed by the cutters they support; and individual cutters manage parts they need to keep them operationally ready. However, no one organization or individual is responsible for consolidating inventory data and tracking the type, quantity, condition, or value of the Coast Guard's total cutter inventory. The Coast Guard's fragmented management structure also limits the agency's ability to determine whether cutters have a shortage or an excess of parts and whether the parts are readily available when needed. We found, for example, that one cutter had 34 excess fuel injector nozzles (above its allowance of 16 nozzles), which cost about $580 each, and two excess starters (above its allowance of one starter), which cost approximately $6,600 each. During our visits to other cutters, we noted many other such excess items as drill presses, main engine cylinder heads, insulation, computer monitors, and galley equipment. Supply officials on the cutters told us that the excesses in their inventories were the result of several factors. For example, sometimes cutters procured larger quantities than needed to take advantage of volume discounts. However, if the Coast Guard centrally managed--at headquarters, a Maintenance and Logistics Command, or a supply center--the total cutter inventory, wherever located, it might be able to transfer excess items to cutters that have shortages of those items. For example, the Atlantic Coast Maintenance and Logistics Command purchased more than 15 new starters in 1 year, while one cutter had 2 excess starters in its inventory. Despite these excesses, officials responsible for the individual cutters' inventories told us that they also had shortages of parts. For example, one cutter had parts shortages totaling $250,000 for such electronic items as circuit boards for radar and communication systems. According to these officials, these kinds of shortages occurred primarily because funding was not available to replenish the cutters' parts or because the required parts were never issued when the cutters were first commissioned. If the Coast Guard centrally managed its total cutter inventory, some of these shortages might have been filled with excess items from other vessels' inventories. The cutter officers noted, however, that although the shortages had not significantly affected their missions, they had resulted in costly emergency purchases that would not have been necessary if the parts had been in the cutters' inventories, as required. During our visits, we found that many items in the cutter inventories were not available to the vessels when they were at sea. Each of the cutters we visited stored a portion of its inventory in its own individual onshore storage facility. Since no one was available to issue parts from these individual storage facilities when the cutters were at sea, these inventories were not fully utilized. We noted such useful items as valves, filters, engine and hydraulic oil, mooring lines, and damage control equipment--fire hoses and nozzles, submersible pumps, shoring, plugs, and oxygen canisters--in the individual onshore facilities. Unlike the Coast Guard, the Navy stores parts for its ships in centralized base supply centers and does not maintain individual onshore storage facilities for its ships. According to Navy officials, the centralized base supply centers provide more effective support than individual storage facilities because personnel are available at the centers to issue parts to the ships whenever the parts are needed. The centers can, for example, send the needed parts to ships at sea via another ship or an aircraft. When a Coast Guard cutter is at sea, no one is available to issue parts from the cutter's individual onshore storage facility. According to Coast Guard officials, the agency is studying the use of regional support centers, but it does not expect to consolidate the individual onshore storage facilities before fiscal year 2002, when it expects to have total "visibility" of its cutters' individual inventories. The Coast Guard uses several different systems to manage the cutters' individual inventories. For example, during our visits to nine cutters, we observed a manual and three different computerized inventory control systems. However, the three automated systems that we observed could not exchange data with each other or with the systems at headquarters, the Maintenance and Logistics Commands, or the supply centers. To help ensure effective inventory management and to distribute parts more efficiently, the Coast Guard plans to implement a single automated system, CMplus, on its 101 largest cutters. The Coast Guard expects this system to integrate inventory and maintenance information into a larger fleet logistics system that will enable cutter crews to share data with each other, headquarters, the Maintenance and Logistics Commands, and the supply centers by the year 2002. According to Coast Guard officials, they expect to spend over $27 million to install the CMplus system on the cutters. Although we agree with the goals of the CMplus system, the Coast Guard can take interim actions to enhance the distribution of its inventory between now and the year 2002, when CMplus will be fully implemented. For example, the Coast Guard can utilize the most widely used, existing inventory system to enhance the distribution of parts by sending the inventory information to headquarters and to the Maintenance and Logistics Commands for analysis. In 1993, Coast Guard headquarters and one Maintenance and Logistics Command analyzed the inventories held by all of the 270-foot cutters. Because all 13 of these cutters used the same computer system, the Coast Guard was able to consolidate their inventory data. The data showed that the 13 cutters had more than $11 million worth of excess parts in their inventories and that $3 million of the excess could be redistributed among the cutters to offset their parts allowance shortfalls and reduce future acquisitions. The Coast Guard incurred minimal time and costs (less than 1 staff year) to perform the analysis because all of the 270-foot cutters had conducted full physical inventories of their parts and supplies and implemented a computerized inventory control program. Moreover, the payoff was significant and could be increased if the Coast Guard conducted similar analyses for most other classes of cutters because they have also already conducted full physical inventories when they implemented their computerized inventory control systems. Although such analyses could greatly improve the distribution of parts and supplies, they could not themselves ensure the optimal distribution of inventories for two reasons. First, because the cutters cannot directly transmit inventory data to the Maintenance and Logistics Commands conducting the analysis, the consolidated inventory information would not be current when the cutters began to redistribute their parts. Second, the Maintenance and Logistics Command conducted the redistribution study on a single class of cutters because conducting a fleetwide study would have taken much longer using current computer resources. If future analyses are conducted for only one class of cutter at a time, parts and supplies will not be redistributed between classes. When the Coast Guard's fleet logistics system is implemented, it will deal with these two limitations of the current system. In 1993, the Coast Guard issued its Logistics Master Plan. The plan addresses numerous issues--for example, the Coast Guard's lack of central management for the cutter inventories. The plan includes short-term actions that the Coast Guard expected to complete by fiscal year 1994, mid-term actions to be completed by fiscal year 1997, and 26 long-term actions that the Coast Guard expected to complete by the end of fiscal year 2002. Although we agree with the plan's direction, we found that some initiatives are already behind schedule, increasing the potential for delays in the Coast Guard's long-term efforts to centrally manage its inventories by fiscal year 2002. (App. I lists some of the initiatives that are in progress or planned.) Coast Guard officials told us that before the agency can centrally manage its inventory, they must complete the following long-term initiatives in the Logistics Master Plan: Develop a fully integrated, real-time computer system to track and consolidate inventory and maintenance information for the cutters. Create a single organization to integrate the maintenance guidance, technical, and supply functions now performed by headquarters and the two inventory supply centers. Designate an official to be responsible for all fleet logistics. We found that the completion of these and many other long-term initiatives in the plan are contingent upon the Coast Guard's successfully completing numerous near- and mid-term initiatives. However, the Coast Guard has already experienced schedule slippages with some of the near- and mid-term initiatives begun in 1993 and 1994. For example, the Coast Guard had expected to implement the following new initiatives: A computerized inventory control system, CMplus, on the first cutter of the 378-foot class by the end of 1993. However, the system will not be operational until December 1994 (a 1-year delay) because of such operational commitments as transporting Haitian and Cuban refugees. According to officials, CMplus is a critical part of the Coast Guard's long-term initiative to develop a fully integrated, real-time system to track and consolidate inventory and maintenance data for its cutters. A computer system at Curtis Bay by the fourth quarter of fiscal year 1994. However, the Coast Guard does not expect to have the system fully implemented until the third quarter of fiscal year 1996 (almost a 2-year delay) because of a 1-year delay in the award of the hardware contract and because of software development problems. According to officials, this system is needed to enable the Coast Guard to track and consolidate inventory and maintenance data for the cutters. Centralized shoreside support for its 110-foot cutters (49 vessels) by fiscal year 1996. The Coast Guard now expects to have this new management structure by fiscal year 1998 (a 2-year delay). Until that time, according to officials, the Coast Guard cannot centrally manage its cutter inventories because it does not have visibility of the inventories. The $140 million inventory held at the Coast Guard's two supply centers does not reflect the agency's total investment in spare and repair parts for its cutters. The Coast Guard does not know the type, quantity, condition, or total value of its total inventory of parts and supplies for its cutters. However, the Coast Guard estimates that it has additional inventory worth approximately $200 million stored onboard its cutters and in the cutters' individual onshore storage facilities. Although Coast Guard officials contend that the agency's lack of information on parts and supplies has not significantly affected the Coast Guard's mission, it has resulted in inefficient management of resources. Consequently, the agency cannot minimize the cost of its total inventory as required by federal property management regulations and DOT's policy. In addition, the Coast Guard does not expect to complete its integrated system to enhance the use and distribution of its inventory until the year 2002. Yet delays of as much as 2 years for some early initiatives raise concerns that the Coast Guard will not meet its targeted completion date. Since the Coast Guard may take many years to improve its inventory management system, some actions now could help alleviate shortages and excesses and help the Coast Guard better utilize its inventories. To enable the Coast Guard to manage its cutter inventories more effectively between now and when the Logistics Master Plan is fully implemented, we recommend that the Secretary of Transportation direct the Coast Guard Commandant to take the following interim actions: Make the use of the current automated inventory control program mandatory on all cutters that have sufficient computer hardware and have not implemented CMplus, consolidate and analyze inventory data for each class, and redistribute excess parts from additional cutter classes as warranted. Where economically feasible, consolidate at regional support centers those cutter inventories that are located at individual onshore storage facilities, particularly where several cutters from the same class are clustered or where the cutters' individual onshore storage facilities are housed within a single building. Move up the implementation date for the Coast Guard's initiative to establish a single source of accountability for all fleet logistics. This action will allow the Coast Guard to better coordinate interim actions to improve management of its cutter inventories while the fleetwide logistics system is being developed. We discussed this report with the Coast Guard's Chief, Logistics Management Division, Office of Engineering, Logistics, and Development, and with other program officials, and we have incorporated their comments as appropriate. These officials generally agreed with our findings and recommendations. We conducted our work between November 1993 and December 1994 in accordance with generally accepted government auditing standards. Our objectives, scope, and methodology are discussed in appendix II. We are sending copies of this report today to the Secretary of Transportation; the Commandant, Coast Guard; and the Director, Office of Management and Budget. We will make copies available to others upon request. This work was performed under my direction. If you have any questions, I can be reached at (202) 512-2834. Major contributors to this report are listed in appendix III. The Coast Guard's Logistics Master Plan sets out short-, mid-, and long-term objectives to improve the agency's inventory controls by fiscal year 2002. This appendix provides (1) a brief description of the major initiatives related to central management of the Coast Guard's inventories and (2) the status of the initiatives that were scheduled for completion in fiscal years 1993 and 1994. The Coast Guard relocated the Brooklyn, New York, supply center to Baltimore in 1993, as planned. This action was the first step toward the Coast Guard's creating a single organization to integrate the maintenance, technical, and supply functions now performed by headquarters and the two inventory supply centers. The Coast Guard designated one Maintenance and Logistics Command to be responsible for an entire class of cutters, regardless of their home ports, including the development of a maintenance plan that lists the minimum information needed for a major overhaul or minor repairs at shipyards and bases. This initiative helped Curtis Bay to increase the availability of parts for 270-foot cutters from 65 percent in March 1992 to 94 percent in March 1994. In addition, the Coast Guard developed improved maintenance plans and long-range forecasts for its 210-, 180-, 157-, and 140-foot cutters in 1993 and 1994, as scheduled. The Coast Guard implemented a central supply department on its 378-foot cutters in 1992 and on its 399- and 270-foot cutters in 1993, as scheduled. Previously the Coast Guard maintained department-level inventories on these cutters that resulted in duplicate procurements, excess spare parts, reduced storage capacities, and longer casualty response times, according to Coast Guard officials. The new centralized supply departments have helped to alleviate many of these problems because all of the cutters' parts information is located in one data base. Centralization of parts information also helps to save space on the cutters because duplicate parts that were previously stocked by more than one department are readily visible and can either be used, transferred, or scrapped. Finally, a central supply department increases operational readiness because procurements are coordinated across departments, making more effective use of available spare parts funding. The Coast Guard implemented an automated system, CMplus, to integrate shipboard supply and maintenance information on three of its cutters. According to Coast Guard officials, this system will be the cornerstone of its centralized fleet logistics system. The Coast Guard implemented the system on 1 of its 210-foot cutters (a class of 16 vessels), 1 of its 270-foot cutters (a class of 13 vessels), and 1 of its 378-foot cutters (a class of 12 vessels) in 1994. The Coast Guard had placed a prototype CMplus system on a 140-foot cutter in 1992 and had expected to implement the system on its eight remaining 140-foot cutters by the fourth quarter of 1994, but this date has slipped to fiscal year 1997. The Coast Guard had expected to purchase the hardware to replace its supply center computers in the fourth quarter of fiscal year 1993. Although the agency has purchased developmental hardware for the new system, procurement of the new production hardware is now scheduled for the third quarter of fiscal year 1995. This purchase is a key step in instituting the standardized fleet logistics system that the Coast Guard expects to have fully operational by the year 2002. The Coast Guard had expected to develop the software for its new supply center computer system by the end of 1994. Although the Coast Guard wants to get the new system on line as quickly as possible, the projected date for the initial software has slipped to the third quarter of 1996 because of technical difficulties and a delay in purchasing the needed hardware. Develop improved maintenance plans and long-range spare parts forecasts for the 110-foot cutters. Implement a central supply department on the 210-, 140-, and 110-foot cutters and study the feasibility of implementing it on smaller cutters and bases. Analyze the feasibility of transferring management of such consumable items as nuts, bolts, and bearings to the Defense Logistics Agency. Install the new automated inventory control system on the remaining 270-foot cutters and on the 399-foot cutters. Implement building block, software application groups for a standardized fleetwide logistic system. The application groups will include maintenance planning, scheduling, funds management, parts tracking, contract management, supply performance measures, and cost analysis. Install the new automated inventory control system on the remainder of the 378-foot and 210-foot cutters and on the 110-foot cutters. Integrate maintenance, technical, and supply functions, which are now performed by headquarters and the two supply centers, into a central engineering logistics center at Curtis Bay. Designate a single official responsible for all logistics. Complete procurement of both the hardware and software for the standardized fleet logistics system and implement the remaining software application groups, including customer service, technical information, and equipment management. The Coast Guard expects that this system will integrate shipboard logistics systems with shoreside systems so that the supply centers will have information about the cutters' inventories, equipment usage, and costs. The former Chairman, Subcommittee on Oversight of Government Management, Senate Committee on Governmental Affairs, asked us to examine the Coast Guard's inventory management system to identify any wasteful or inefficient practices that should be changed. As agreed with the former Chairman's office, we focused our review on the Coast Guard's inventory management system for its 240 cutters (vessels 65 to 399 feet in length) and developed the following specific questions to guide our work. First, does the Coast Guard have the systems needed to effectively manage its inventory of spare and repair parts and supplies? Second, if not, what initiatives does the Coast Guard have under way to improve its inventory management? In preparing this report, we reviewed federal property management regulations (41 C.F.R. 101); the Department of Transportation's Order 4420.5, Management of Material Inventories; and the Coast Guard's Supply Policy and Procedures Manual. To determine the cost effectiveness of the Coast Guard's inventory management systems, we met with officials from the Coast Guard's supply centers at Baltimore and Curtis Bay, Maryland, and reviewed their instructions, notices, and video tapes related to inventory management and supply support. We also reviewed Curtis Bay's Supply Activity Reports for 1989 through 1993 and its list of inventory items for the 378-, 270-, and 210-foot cutters. We also met with officials from headquarters; the Maintenance and Logistic Command for the Atlantic Fleet; the Coast Guard District Five Office and the Naval Engineering Support Unit in Portsmouth, Virginia; the Coast Guard Group/Air Station in Cape May, New Jersey; and individual cutters. Using the Coast Guard's register of cutters, we selected a judgmental sample of cutters to visit. Because of the large number of Coast Guard cutters (240), we defined our sample in three ways. First, we selected only cutters that were at least 82 feet long because larger cutters typically hold more inventory than smaller cutters. Second, we visited only cutters that had at least five ships in the class because we wanted the cutters to be typical of the largest number of cutters possible. Finally, when two or more classes existed for vessels of the same length and type (i.e., 210-foot, medium endurance cutters, 210A and 210B), we visited only one cutter from the combined classes because the cutters in the combined classes were still very similar to each other. Table II.1 lists the type, class, and number of Coast Guard cutters. Table II.2 lists the name, type, location, and size of each of the nine cutters we visited. The classes of the nine cutters account for 178 of the Coast Guard's 240 cutters. (continued) Philadelphia, Pa. Governors Island, N.Y. Cape May, N.J. Cape May, N.J. Cape May, N.J. Cape May, N.J. Boston, Mass. Newport, R.I. Portsmouth, Va. To determine the Coast Guard's initiatives related to its inventory controls, we reviewed the Coast Guard's 1993 Logistics Master Plan. We also obtained information on the actions that the Coast Guard had undertaken that were not part of the Logistics Master Plan, such as the Supply Center Information Systems Plan and user manuals for the computerized inventory systems used on the Coast Guard's larger cutters. We met with headquarters, supply center, and Maintenance and Logistics Command officials who were responsible for these initiatives to determine their status and obtain clarification on the benefits expected. (App. I describes some of the initiatives and their status.) M. Glenn Knoepfle, Adviser Michael J. Ferren, 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. 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Pursuant to a congressional request, GAO reviewed the Coast Guard's inventory management system for its fleet of 240 cutters to identify any wasteful or inefficient practices that should be changed, focusing on: (1) whether the Coast Guard has the systems it needs to effectively manage its inventory of spare and repair parts and supplies; and (2) initiatives the Coast Guard has under way to improve its inventory management. GAO found that: (1) the Coast Guard does not have the organizational structure or computer systems necessary to effectively manage its inventory for supporting cutters; (2) the Coast Guard does not know the value, type, quantity, and condition of many of the spare and repair parts in its inventory and cannot determine whether cutters have a shortage or an excess of parts, or whether the parts are readily available; (3) Coast Guard officials believe that the lack of inventory management information has not seriously affected the Coast Guard's ability to carry out its missions, although they acknowledge that it has resulted in costly purchases and excess inventory; (4) the Coast Guard plans to take actions to improve its inventory control problems by fiscal year 2002; and (5) some of the Coast Guard's initiatives are already behind schedule, delaying both its short-term actions and its long-term inventory management efforts.

We assessed the DEAMS schedule 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 and work breakdown structure. In assessing the program's cost estimate, we used the GAO Cost Guide to evaluate the DEAMS 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 interviewed key program officials, such as the Program Manager, lead schedulers, and cost estimators, to obtain information, such as explanations to resolve identified discrepancies. After we briefed DEAMS program officials on the results of our assessment, they provided an updated schedule dated October 2012. For this updated schedule, we determined the extent to which it met certain best practices for the comprehensive, well-constructed, and credible characteristics, because not implementing these best practices would affect the reliability of the entire schedule. In May 2013, program management officials provided another updated DEAMS schedule, which they acknowledged contained issues that prevented the schedule from meeting best practices. Although we did not independently assess the May 2013 schedule, we did confirm that it included certain information needed for long-term planning. We conducted this performance audit from May 2012 to February 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. DEAMS was initiated in August 2003 and is intended to provide the Air Force with the entire spectrum of financial management capabilities, including collections, commitments and obligations, cost accounting, general ledger, funds control, receipt and acceptance, accounts payable and disbursement, billing, and financial reporting for the general fund. In February 2012, the DOD Deputy Chief Management Officer granted Milestone B approval for DEAMS to enter the Engineering Development Phase of the acquisition life cycle, which is considered the official start of the program. DEAMS program functionality is intended to be implemented across the Air Force in a series of releases in two increments--Increment 1 will include six releases and Increment 2 will include two releases. DOD has approved the funding for the Air Force to proceed with the acquisition of the functionality for the first increment of DEAMS. This funding is approximately $1.6 billion, with deployment scheduled to occur during the fourth quarter of fiscal year 2016. The Air Force reported that it had spent about $427.5 million as of September 30, 2013, on the program. As stated earlier, in October 2010, we reported that although the Air Force met best practices in developing a cost estimate, it did not meet best practices in developing the schedule estimate for implementing DEAMS. In particular, the Air Force had not developed a fully integrated master schedule that reflected all government and contractor activities. We recommended that the Air Force 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, identifying float between activities, conducting a schedule risk analysis, and updating the schedule using logic and durations to determine dates. DOD concurred with our recommendation, and we discuss later in this report the status of DOD's efforts to address this recommendation. In March 2009, we published the Cost Guide to address a gap in federal guidance about processes, procedures, and practices needed for ensuring 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 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. A well-planned schedule is a fundamental management tool that can help government programs use public funds effectively by specifying when work will be performed in the future and measuring program performance against an approved plan. Moreover, as a model of time, an integrated and reliable schedule can show when major events are expected to occur as well as the completion dates for all activities leading up to them, which can help determine if the program's parameters are realistic and achievable. A program's success depends in part on the quality of its schedule. We found that the schedule for the DEAMS program did not meet best practices. The cost estimate did meet best practices, but the issues associated with the schedule could negatively affect the cost estimate. Specifically, the DEAMS schedule supporting the February 2012 Milestone B decision partially or minimally met the four characteristics for developing a high-quality and reliable schedule--it was not comprehensive, well-constructed, credible, or controlled. In addition, our assessment of the October 2012 updated schedule found that it was not comprehensive, well-constructed, and credible and thus was also not reliable. In contrast, the DEAMS cost estimate fully or substantially met the four characteristics of a high-quality and reliable cost estimate--it was comprehensive, well-documented, accurate, and credible. However, because the cost estimate is based on the schedule, the unreliability of the schedule could affect the cost estimate. For example, if there are schedule slippages, the costs for the program could be greater than currently estimated. Our analysis found that the DEAMS program partially met three and minimally met one of the characteristics of a reliable schedule estimate and therefore did not provide the information needed to support the February 2012 Milestone B decision (see table 1). Appendix I contains our detailed analysis of the DEAMS 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 roadmap 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 do the work; and how long each activity will take. We found that the schedule used to support the Milestone B decision included the activities to be performed by both the government and contractor for Releases 1 through 3 of Increment 1. However, the schedule did not reflect activities to be performed for Releases 4 through 6 of Increment 1 and for Releases 1 and 2 of Increment 2. The DEAMS Program Manager stated that a comprehensive schedule for Increment 1 that included the activities for all six releases would not be completed until mid-2014. The Program Manager also stated that Increment 2 had not been included because program officials did not know the detailed activities to be performed that far in advance. To address this issue, the DEAMS program office developed a roadmap depicting Releases 1 through 6 of Increment 1 and Releases 1 and 2 of Increment 2 with a full deployment date of fiscal year 2017. However, the program office did not provide a schedule that supported the estimated dates in the roadmap. A comprehensive schedule should reflect all of a program's activities and recognize that uncertainties and unknown factors in schedule estimates can stem from, among other things, data limitations. As such, a schedule incorporates different levels of detail depending on the information available at any point in time. That is, near-term effort will be planned in greater detail than long-term effort. Effort beyond the near term that is less well defined is represented within the schedule as long-term planning packages. Planning packages are a summarization of the work to be performed in the distant future with less specificity. Planning packages are planned at higher levels such that a single activity may represent several months of effort, generic work to be accomplished, or even a future contract or phase. Planning packages can be used as long as they are defined and estimated as well as possible. By not including all work for all deliverables for both increments and all releases, the DEAMS program could incur difficulties resulting from an incomplete understanding of the plan and what constitutes a successful conclusion for the program. DEAMS program officials provided a draft of the Schedule Management Plan that documented their intent to use a planning package approach when updating the DEAMS schedule in the future. Resources were identified in the schedule; however, the resources were not assigned to specific activities in the schedule. Although our analysis determined that activity durations were manageable and reasonably estimated, resource availability affects estimates of work and its duration, as well as resources that will be available for subsequent activities. DEAMS program management officials told us that government resource allocations are determined by management as needed. These officials told us that management does not necessarily take into consideration the resource information captured in the schedule when determining resource allocations. However, DEAMS officials did not provide any documentation that specific resources were being mapped to the schedule. As mentioned above, the estimates of work required and duration for an activity are tied to the availability of resources; therefore, the lack of such information could hinder management's ability to compute total labor and equipment hours, calculate total project and per-period cost, resolve resource conflicts, and establish the reasonableness of the plan. 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 establishment of a 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 majority of logic used to sequence the activities within the schedule was generally error-free with a minimal use of lags, clearly indicating to program management the order of activities that must be accomplished. Although we found few missing logic relationships for Release 3 of Increment 1, approximately 25 percent of the remaining activities for Releases 1 and 2 of Increment 1 were missing logic relationships. Because interdependencies among activities were not identified, the DEAMS program management officials' ability to properly calculate dates and predict changes in the future is impaired. We found a significant number of constraints for activities throughout the schedule. A schedule is intended to be a dynamic, proactive planning and risk mitigation tool that models the program and can be used to track progress toward important milestones. Schedules with constrained dates can portray an artificial or unrealistic view of the project. Constraints should be minimized because they can create false dates in a schedule. Further, the schedule did not have a valid critical path and identified critical activities more by their constraints than by logic. Rather than relying on 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 done. Without a valid critical path, management cannot focus on activities that will have detrimental effects on the key project milestones and deliveries if they slip. We found that total float was not reasonable, and that in some instances unreasonable float was a direct result of improper sequencing or missing logic. Releases 1 and 2 of Increment 1 showed that 25 percent of program activities had total float equal to or greater than 392 working days, meaning that those activities could slip almost 2 working years and not affect the end date of the program. Without knowledge of the reason float exists 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. 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. 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 Release 3 of Increment 1 exhibited horizontal integration, but Releases 1 and 2 of Increment 1 did not because date constraints prevented forecasted dates from being calculated realistically for future activities. If the schedule lacks horizontal integration, activities whose durations are greatly extended will have no effect on key milestones reflected in the schedule. We further found that Releases 1 and 2 of Increment 1 did not demonstrate vertical integration. For example, we found instances where the start dates for the same activities differed by 1 day, 1 week, and 1 month between the government and contractor schedules. Unless the schedule is vertically integrated, lower-level schedules will not be consistent with upper-level schedule milestones, affecting the integrity of the entire schedule and the ability of different teams to work to the same schedule expectations. DEAMS program management officials stated that a schedule risk analysis had not been conducted because the schedule had not been approved to be used as a baseline schedule--the target schedule against which program performance can be measured, monitored, and reported. These officials stated that although this analysis had not been conducted, they were collecting best-case and worst-case durations from the contractor with their periodic schedule delivery. These data can be used by program management to calculate more reliable estimates of durations for future activities. However, we found that the schedule did not contain best- or worst-case duration data for 600 of 605 detailed activities. For the five instances where duration data were contained in the schedule, we determined that four were questionable because two activities were already completed and two had already exceeded the worst-case estimate. If a schedule risk analysis is not conducted, program management cannot determine the likelihood of the project's completion date, how much schedule risk contingency is needed to provide an acceptable level of certainty for completion by a specific date, risks most likely to delay the project, how much contingency reserve each risk requires, and the paths or activities that are most likely to delay the project. As discussed later, the lack of a schedule risk analysis can affect the credibility of the cost estimate. Controlled. A schedule should be continuously 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 continuously 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 DEAMS program management met weekly to discuss proposed schedule changes and updated the schedule's progress. However, a schedule narrative was not prepared by DEAMS program management. In addition, we found a number of date anomalies throughout the schedule, including activities with planned start dates scheduled to occur in the past and activities with actual finish dates scheduled to occur in the future. We also found a number of out-of- sequence activities in the schedule--activities that started before their predecessors finished, in contradiction to the planned sequence. If the schedule is not continually monitored to determine when forecasted completion dates differ from planned dates, then it cannot be used to determine whether schedule variances will affect work needed to be accomplished at a future date. We also found that there was no baseline schedule that could be used to measure program performance. DEAMS program management officials did maintain a schedule narrative document that contained a list of custom fields and assumptions; however, the document did not explain ground rules and assumptions, justifications for logic, and other unique features of the schedule. These officials stated that other process documents were being developed. Without a formally established baseline schedule to measure performance against, management cannot identify or mitigate the effect of unfavorable performance. Our assessment of the updated schedule dated October 2012 found that it was not comprehensive, well-constructed and credible. Although the DEAMS Program Manager stated that the government and contractor activities for Releases 1 through 3 of Increment 1 had been integrated in the October 2012 schedule, this schedule was not comprehensive. Specifically, it excluded activities for both the government and contractor related to Releases 4 through 6 of Increment 1 and Releases 1 and 2 of Increment 2. If activities are missing from the schedule, then other best practices will not be met. The schedule was also missing relationships for a significant number of the remaining milestones and activities. In addition, the October 2012 schedule included a significant number of date constraints with little or no justification for their use in the schedule. Similar to the previous schedule, the updated schedule presented unreasonable float throughout and did not include a schedule risk analysis. As a result of these shortcomings, the updated schedule was not reliable. Further, program officials could not rely on this schedule as a baseline to effectively manage and monitor program performance. In May 2013, program management officials provided another updated DEAMS schedule that they stated included some improvements, but they acknowledged that it contained issues that prevented the schedule from meeting best practices. For example, these officials stated that the May 2013 schedule included long-term planning packages for activities related to Releases 4 through 6 of Increment 1 and Releases 1 and 2 of Increment 2, integrated government and contractor activities, and reduced the number of constraints and out-of-sequence activities in the schedule. However, the officials acknowledged that several outstanding issues remained related to, for example, vertical and horizontal integration, missing logic relationships, and the lack of a schedule risk analysis. Although we did not independently assess the May 2013 schedule to determine whether it met the four schedule characteristics, we did confirm that it included long-term planning packages, which are needed to create a complete picture of the program from start to finish and to allow the monitoring of a program's critical path. The results of our analyses of the schedule that supported the February 2012 Milestone B decision and October 2012 DEAMS schedule reflect similar weaknesses to those we reported in October 2010. Therefore, given the findings of this review, our prior recommendation for improving the DEAMS schedule remains valid. We found that the DEAMS program fully or substantially met the four characteristics of a reliable cost estimate to support the Milestone B decision, as shown in table 2. However, because the cost estimate relies on dates derived from the schedule and we are questioning the reliability of the forecasted program dates, the credibility of the cost estimate can be affected. Appendix II contains our detailed analysis of the DEAMS cost estimate. A reliable cost estimate is critical to the success of any program. 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 DEAMS was 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--as outlined in the roadmap prepared by program officials. As stated earlier, the roadmap provided an overall summary of the program's key phases (increments and releases) and the expected milestones for completion. The cost estimate also included an appropriate level of detail, which provided assurance that cost elements were neither omitted nor duplicated, 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. Therefore, 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. We found that the cost estimate for DEAMS was well-documented. The cost estimate captured such things as the source data used, the calculations performed and the results of the calculations, and the rationale for choosing a particular estimating methodology. This information was captured in such a way that the data used to derive the estimate can be traced back to, and verified against, the sources so that the estimate can be easily replicated. However, there was no discussion of efforts taken, if any, to ensure the reliability of the data used. The DEAMS Program Management Office presented evidence of receiving approval of the estimate through briefings to management. Accurate. 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. We found that the cost estimate for DEAMS was accurate. The cost estimate provided results that were substantially unbiased, and the cost model detailed the calculations and inflation indexes underlying the estimate. Calculations within the model could be traced back to supporting documentation. The cost estimate was updated regularly to reflect significant changes in the program and updated annually to incorporate actual costs expended in prior fiscal years. Further, the cost estimate was based on historical data. However, the cost estimate did not discuss variances between planned and actual costs, which would enable estimators to assess how well they are estimating program costs and to identify lessons learned. Credible. A cost estimate should discuss any limitations of the analysis because of uncertainty or biases surrounding data or assumptions. 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 credible. The DEAMS Program Management Office conducted a risk and uncertainty analysis by identifying the cost elements with the greatest degree of uncertainty, determining the cost drivers for the program, and identifying the impact of changing major ground rules and cost driver assumptions. An independent cost estimate developed by the Air Force Cost Analysis Agency was reconciled to the program's estimate. However, a sensitivity analysis was not completed for each of the major cost drivers. As a result, the 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 scenario most affects the cost estimate. Further, as discussed previously, because a schedule risk analysis was not performed as required by best practices, the cost estimate does not include a contingency amount to account for any schedule slippage that could occur. To the extent that a schedule slippage does occur, there could ultimately be an impact on the cost estimate. The Air Force did not meet best practices in developing a schedule for the DEAMS program. As a result, this raises questions about the credibility of the deadline for acquiring and implementing DEAMS to provide needed functionality for financial improvement and audit readiness. Because of these questions, the cost estimate, while following best practices, may not fully capture all costs associated with the program, particularly if there is significant schedule slippage. Moreover, Air Force management did not have a reliable schedule estimate when making its decision to invest in the DEAMS program. It is critical to correct the deficiencies identified with the schedule estimate to help ensure that the projected spending for this program is being used in the most efficient and effective manner. To help provide for the successful implementation of DEAMS, we recommend that the Secretary of the Air Force direct the Under Secretary of the Air Force, in his capacity as the Chief Management Officer, to consider and make any necessary adjustments to the DEAMS cost estimate after addressing our prior recommendation to adopt scheduling best practices. 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. DOD also provided a technical comment, which we incorporated. 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 Air Force; the Assistant Secretary of Defense (Acquisition); the Deputy Chief Management Officer; the Under Secretary of Defense (Comptroller); the Under Secretary of the Air Force, in his capacity as the Chief Management Officer of the Air Force; and the Program Manager for DEAMS. 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 Defense Enterprise Accounting and Management System (DEAMS) schedule estimate supporting the February 2012 Milestone B 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 Defense Enterprise Accounting and Management System (DEAMS) cost estimate supporting the February 2012 Milestone B 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, Cynthia Jackson (Director), Karen Richey (Assistant Director), Beatrice Alff, Jennifer Echard, Patrick Frey, and Jason Lee made key contributions to this report.

The Department of Defense (DOD) has stated that the development and implementation of DEAMS is critical to the department's goal of producing auditable financial statements by September 2017. In October 2010, GAO reported that although the Air Force had developed a cost estimate that met best practices, it had not developed a schedule that met best practices for implementing DEAMS. GAO has published guides that identify the characteristics and associated best practices for developing reliable schedule and cost estimates. GAO was asked to review the schedule and cost estimates for selected DOD systems. This report addresses the extent to which the current schedule and cost estimates for DEAMS were prepared in accordance with GAO's Schedule and Cost Guides. Specifically, GAO's review focused on the schedule and cost estimates that supported DOD's February 2012 Milestone B decision, which determined that investment in DEAMS was justified. GAO assessed the schedule and cost estimates and supporting documentation. GAO also assessed an updated schedule dated October 2012. GAO interviewed DEAMS program officials, lead schedulers, and cost estimators. The Air Force's schedule that supported the February 2012 Milestone B decision for the Defense Enterprise Accounting and Management System (DEAMS) did not meet best practices. The cost estimate did meet best practices, but the issues associated with the schedule could negatively affect the cost estimate. GAO found that the schedule supporting the Air Force's decision to invest in DEAMS partially or minimally met the four characteristics for developing a high-quality and reliable schedule. For example, the schedule did not reflect all government and contractor activities, and resources were not assigned to specific activities. The schedule also lacked a valid critical path, preventing management from focusing on the activities most likely to cause critical program delays if they are not completed as planned. In addition, a schedule risk analysis was not conducted to predict a level of confidence in meeting the program's completion date. GAO found that the October 2012 updated schedule estimate was not comprehensive, well-constructed, and credible, and contained weaknesses similar to those found in the previous schedule. In May 2013, program officials provided a third schedule that they said contained some improvements but acknowledged that issues remained that prevented the schedule from meeting best practices. GAO found that the DEAMS cost estimate fully or substantially met the four 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 and provided for an independent assessment and reconciliation. Because the cost estimate relies on dates derived from the schedule and GAO is questioning the reliability of the schedule, the credibility of the cost estimate could be affected. GAO recommends that the Secretary of the Air Force update the cost estimate as necessary after implementing GAO's prior recommendation to adopt scheduling best practices. DOD concurred with the recommendation.

UAVs are pilotless aircraft, controlled remotely or by preprogrammed on-board equipment. The Outrider system consists of four air vehicles, ground control equipment, one remote video terminal, four modular mission payloads, communications devices, a means of launch and recovery, and one mobile maintenance facility for every three Outrider systems (see fig. 1). The Outrider ACTD grew out of the Joint Tactical UAV program. The original concept of the Joint Tactical UAV program was to acquire (1) a 50-kilometer UAV system, the Maneuver, to satisfy reconnaissance and surveillance needs of Army brigade and Marine Corps regimental commanders and (2) a 200-kilometer UAV system, the Hunter, to satisfy the reconnaissance and surveillance needs of Army corps and division commanders and Navy task force commanders. The Joint Tactical UAV program was restructured in fiscal year 1996. The Hunter portion was canceled and the Maneuver portion was reconstituted as the Outrider ACTD to evaluate one UAV system's ability to perform both the Hunter and Maneuver missions. To streamline the acquisition process, DOD designated Outrider an ACTD in December 1995 and awarded a contract for a 2-year ACTD in May 1996. During this period, DOD will acquire 6 nondevelopmental Outrider systems with 24 air vehicles at a cost of approximately $57 million. DOD can procure more systems during the ACTD using low-rate production options built into the contract and, according to an Outrider program official, has requested $30 million for fiscal year 1998 to do so. According to DOD, the purpose of the Outrider ACTD is to evaluate the utility of the system through a series of operational demonstrations. The Army, the Navy, and the Marine Corps will prepare assessments of the system's military utility based on the operational demonstrations. At the end of the ACTD, Defense Acquisition Board executives will review the service assessments and determine if the ACTD should become a formal acquisition program. If DOD approves transition to the formal acquisition process, program officials must prepare documentation identical to that required of traditional acquisition programs. Prior to beginning the Outrider ACTD, DOD acquired three other nondevelopmental tactical UAV systems: Pioneer, Hunter, and Predator. Each of these UAV programs provided DOD with important lessons about acquisition strategies, system integration, and logistic supportability. However, DOD is not applying these lessons to the Outrider ACTD. DOD's acquisition strategy for the Outrider closely resembles the acquisition strategy used for the Hunter program. After a user demonstration, DOD awarded a low-rate production contract for 7 Hunter systems with 56 aircraft before demonstrating through operational testing that the system was potentially operationally effective and suitable.Testing of the low-rate production Hunter systems revealed numerous problems, and eventually DOD terminated the Hunter program. Similarly, according to an Outrider program official, DOD plans to exercise a contract option for low-rate production of three to six additional Outrider systems in April 1998 before conducting realistic operational testing. The program official stated that user demonstrations conducted prior to April 1998 as part of the ACTD will provide a sufficient basis for making a low-rate production decision. These user demonstrations, however, will not provide the same level of assurance for justifying a low-rate production commitment as would operational testing since such testing involves meeting minimally acceptable thresholds for key performance parameters. Outrider as an ACTD system has neither key parameters nor thresholds, and DOD is not required to establish them for the demonstrations. Lessons learned from prior UAV programs illustrate that nondevelopmental UAV systems should be operationally tested in realistic environments before beginning low-rate production. Our past work has shown that production of nondevelopmental UAV systems before operational testing can result in adverse consequences. DOD started producing two nondevelopmental UAVs--the Pioneer and, more recently, the Hunter--before subjecting either to any operational testing. The problems DOD has experienced with these systems clearly illustrate the adverse consequences of beginning production without having adequate assurance of satisfactory system performance. Specifically, in 1990, we reported that lack of Pioneer operational testing led the Navy to costly and time-consuming trial and error while trying to adapt the system for shipboard use. Ultimately, DOD spent about $50 million redesigning and modifying Pioneer systems initially acquired for $56 million. Undeterred by the experience with Pioneer, DOD then started production of the Hunter without subjecting it to operational testing. In 1992, we reported that DOD should not award a production contract for the Hunter based on limited testing in unrealistic environments. Nevertheless, DOD awarded a contract for seven Hunter systems. These systems were unable to meet requirements, and the program was terminated in 1995 after an investment of over $757 million. Integrating nondevelopmental components into a fieldable Outrider system is proving more challenging than DOD anticipated. According to program officials, integrating components necessary to satisfy the naval requirements, such as electromagnetic interference shielding and stronger landing gear, delayed Outrider's first flight from November 1996 to March 1997. Because the Outrider ACTD has a 2-year time limit, schedule delays result in less time available for the users to assess the system's military utility. These nondevelopmental UAV integration lessons are not new to DOD. The Hunter and Pioneer were both procured by DOD as nondevelopmental systems. Both systems required the expenditure of unexpected development time and money in retroactive attempts to solve integration problems. For example, we stated in our September 28, 1990, report, that the Pioneer system required substantial development to integrate the system into a shipboard environment. In addition, in 1995, DOD concurred with us that the complexity of the Hunter subsystem integration was significantly underestimated by both the government and the contractor. An independent DOD team that reviewed the Hunter UAV in 1995 reported that using nondevelopmental subsystems misled many into believing that integrating nondevelopmental subsystems would not require substantial development. The team recommended that the services should consider and reevaluate the advantage of attempting to procure nondevelopmental subsystems without allowing for some developmental effort needed to integrate them into the overall system. DOD plans to award a low-rate production contract for up to six Outrider systems without demonstrating a critical component of military utility--whether the system is user-supportable. The ACTD's operational demonstrations will not realistically address the user-supportability of the Outrider system. According to an Outrider program official, the user will perform only basic maintenance during the operational demonstrations, while the contractor will perform all other maintenance. Furthermore, the Outrider ACTD will not include a logistics demonstration to show that the system is user-supportable without contractor assistance. UAV lessons learned show that procuring nondevelopmental systems without assurance that they are user-supportable results in cost growth and program delays. For example, a logistics demonstration conducted after DOD procured seven low-rate production Hunter systems revealed the system was not user sustainable. DOD analysts reported that the perception in the Hunter program was that logistics would be easy to add to a nondevelopmental system. In reality, adding military logistics to a nondevelopmental system proved a significant challenge. The analysts noted that an expensive, time-consuming developmental effort was needed to acquire the logistics support for Hunter. In addition, while ACTD unit cost may be low, militarizing capabilities and adding logistics support increases program costs. For example, while a Predator ACTD system cost about $15 million, a Predator combat-ready production system, with configuration changes, added subsystems, and full integrated logistics support provisions, costs about twice that amount. The Outrider system may not satisfy user needs unless problems associated with meeting joint requirements are resolved and interoperability with other DOD systems can be achieved. Design changes necessary to increase Outrider's range to 200 kilometers have delayed the program and have increased the weight of the air vehicle to the point it may not be suitable for shipboard operations. Furthermore, developing an air vehicle engine suitable for naval use has proven problematic. In addition, the Outrider analog datalink is not compliant with DOD's communications interoperability standards for reconnaissance assets and provides limited payload growth options. The Outrider system is encountering technical problems that must be resolved before the system can meet user needs. First flight of the Outrider system was delayed 4 months because of these problems. According to program officials, these problems arose from modifying the Outrider to satisfy joint requirements. The Outrider system was originally designed to satisfy the 50 kilometer, land-based, Army maneuver UAV requirement. Under the ACTD, Outrider's joint range requirement is 200 kilometers and includes operation from amphibious ships. Modifications to satisfy joint requirements have necessitated several changes to the air vehicle design. These changes, such as adding electromagnetic interference shielding for shipboard operations and increasing air vehicle size to satisfy the range requirement, have added a large amount of weight to the air vehicle. Since DOD awarded the ACTD contract in May 1996, the weight of the fueled air vehicle has grown from the proposed 385 pounds to an actual of 578 pounds. The added weight increases the distance necessary to launch and recover the air vehicle. According to an Outrider oversight official, this could necessitate the use of arresting cables or barrier nets on the deck of a ship. According to Navy officials, the Navy is reluctant to use cables or nets to recover the Outrider because of the impact on other shipboard flight operations. The Navy has previously expressed concerns about the adverse impact of arresting cables and barrier nets on the normal flight operations of amphibious assault ships. In December 1995, we reported that Navy fleet officials opposed fielding the Hunter UAV on Navy ships because erecting barrier nets would adversely impact other flight operations from their amphibious assault ships. Additionally, Outrider's joint requirements include a heavy fuel engine. Naval use requires a heavy fuel engine because the automotive gasoline currently used by the Outrider is considered too combustible for safe use on ships. DOD research officials estimate it may ultimately cost $100 million to develop a heavy fuel engine that is small enough to power the Outrider. Without a heavy fuel engine, the system will not satisfy naval users. A senior program official acknowledged the heavy fuel engine development is not proceeding as successfully as planned, and the current gasoline engine is not performing adequately. Consequently, 1 year into the ACTD, DOD now plans to acquire another gasoline engine. DOD is not capitalizing on opportunities to demonstrate that Outrider will be interoperable with other DOD systems during the ACTD period. DOD will not be demonstrating the Outrider with the Army and the Navy's standardized computer workstations or with the software being designed to control all tactical UAVs, including the Predator UAV system, which is already in production. Nor will DOD be demonstrating the Outrider with a DOD-compliant Common Data Link (CDL) that would allow information from the Outrider to be more easily transferred to other DOD systems. DOD is developing a tactical control system that will control all tactical UAVs. The current Outrider and Predator control systems are incompatible and do not meet standards for communications compatibility with DOD's other airborne reconnaissance systems. Although the Outrider will be required to work with the tactical control system, according to an Outrider program official, DOD will attempt to demonstrate interoperability on only one occasion during the ACTD. A potentially serious interoperability issue may arise if the Outrider development schedule is not aligned with the tactical control system program schedule. The tactical control system is primarily software designed to perform common mission planning and control for all tactical UAVs, including the Outrider, and it will be installed on computers already used by the services, such as the Navy's TAC-4 and the Army's Sunspark Systems. However, during the ACTD, DOD is allowing the Outrider contractor the option of using either (1) Outrider-specific hardware and software that is supposed to be interoperable with the tactical control system or (2) the tactical control system. According to the Outrider Demonstration Manager, the contractor has opted to use the Outrider-specific equipment, and only one demonstration of interoperability between the Outrider equipment and the tactical control system is planned for the ACTD. If the actual tactical control system and service computers are not used during the ACTD, the services' overall assessments of military utility will not be based on actual system performance. DOD acknowledges the risk their plan creates of not achieving the required interoperability between the Outrider and the tactical control system. The Outrider datalink is not compliant with the CDL, DOD's standard for communications interoperability for all airborne reconnaissance and surveillance missions, including those missions performed by the Outrider. The CDL requires a digital data link, whereas the Outrider employs an analog data link. According to officials from the Defense Airborne Reconnaissance Office, which is responsible for airborne reconnaissance and intelligence communications interoperability, the analog data link has no growth options and operates in the same widely used band of the microwave spectrum as European and Korean television. These officials noted that a CDL-compliant digital data link would offer the Outrider program several advantages over the current analog link. For example, a digital data link would (1) be less susceptible to distortion and interference, (2) minimize a system's signature, (3) provide anti-jam capabilities, and (4) offer encrypted communications. The digital data link also provides for greater capability, including (1) a means to upgrade to all-weather payloads, such as the synthetic aperture and millimeter wave radars and (2) computer processing of gathered imagery. A Defense Airborne Reconnaissance Office study indicates that a short development effort could result in a CDL-compliant digital data link for the Outrider at an acceptable cost. However, Outrider officials maintain that a CDL-compliant digital data link would be too expensive given Outrider's post-ACTD cost limit of $350,000 for the 33rd air vehicle and sensor. Because DOD's strategy for acquiring the nondevelopmental Outrider system will not provide assurance of successful performance and interoperability before DOD's planned low-rate production decision, and to avoid repeating the mistakes of prior UAV programs, we recommend that the Secretary of Defense delay low-rate production of the Outrider system until the results of operational testing of available systems demonstrate it is potentially operationally effective and operationally suitable for all intended users. DOD reviewed a draft of this report. DOD disagreed with most of our findings. It partially concurred with our recommendation. Specifically, DOD disagreed that it had not learned from problems in past programs and stated these problems in part led it to initiate the Outrider ACTD. DOD also disagreed that Outrider may not satisfy user needs unless it meets the Navy's shipboard requirements and is interoperable with the tactical control system. It stated that the ACTD responds to an approved joint requirement and does not identify service unique requirements, but will address the effect of weight and engine type. DOD also noted that it has formed an integrated team between the Outrider and tactical control system programs and taken other measures to ensure interoperability. We recognize that DOD is aware of problems with past UAV programs and agree that an ACTD can provide useful insights. However, we remain concerned about DOD's strategy for the Outrider because the planned demonstrations of military utility that will precede DOD's low-rate production decision are (1) limited in scope; (2) will not be complete before the decision; and (3) may not identify and resolve serious system deficiencies, such as compatibility with joint requirements, and interoperability with the tactical control system. As detailed in this report, similar acquisition strategies for the Hunter and Pioneer programs resulted in the acquisition of additional systems that required costly modifications in order to meet user needs. DOD has the opportunity to operationally test the Outrider's performance without risking commitment to additional unproven systems under low-rate production. DOD is acquiring 6 Outrider systems with 24 aircraft under the original contract. If the Outrider is assessed positively during the ACTD, DOD could modify the ACTD hardware to the production representative design for operational tests. If the required changes are so significant that the ACTD systems cannot be made production representative, DOD guidance on transitioning ACTDs to formal acquisition indicates that a new competition should be conducted. In responding to our recommendation, DOD concurred that Outrider should not enter production until the results of operational testing demonstrate its effectiveness and suitability. DOD noted that completing operational test and evaluation is a statutory requirement for formal acquisition programs entering production. DOD added, however, that this statute does not apply to ACTDs entering low-rate production. We recognize that full operational testing is not a statutory requirement for ACTDs entering low-rate production. However, our past work shows that awarding low-rate initial production contracts without any operational testing has resulted in the procurement of substantial inventories of unsatisfactory weapons requiring costly modifications to achieve satisfactory performance and, in some cases, deployment of substandard systems to combat forces. To determine whether DOD is applying lessons learned from prior UAV lessons learned to this program, and whether the Outrider would meet user needs, we reviewed program plans, test schedules, performance documents, and other records relating to the Outrider ACTD and examined DOD guidance related to systems acquisition, acquisition streamlining and reform, and ACTDs. We also interviewed and obtained information from knowledgeable officials of the Joint Chiefs of Staff; the Office of the Secretary of Defense; Defense Airborne Reconnaissance Office; Chief of Naval Operations; Department of the Navy, Program Executive Office for Cruise Missiles and UAV Joint Project; Department of the Army, Operational Test and Evaluation Command; and the Department of the Air Force, Deputy Chief of Staff Plans and Operations. All of these officials are located in the greater Washington, D.C., metropolitan area. Furthermore, we interviewed and obtained information from representatives of the Commander in Chief, U.S. Atlantic Fleet, Norfolk, Virginia; the Department of the Navy, Operational Test and Evaluation Forces Command, Norfolk, Virginia; the Joint Tactical UAV Project Office, Huntsville, Alabama; Defense Contract Audit Agency, Hopkins, Minnesota; Defense Contract Management Command, Hopkins, Minnesota; and the Outrider ACTD contractor, Alliant TechSystems, Hopkins, Minnesota. We performed our work from July 1996 to June 1997 in accordance with generally accepted government auditing standards. This report contains a recommendation to you. As you know, 31 U.S.C. 720 requires the head of a federal agency to submit a written statement on actions taken on our recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of the report. A written statement also must be submitted to the Senate and House Committees on Appropriations with an agency's first request for appropriations made more than 60 days after the date of the report. We are sending copies of this report to appropriate congressional committees; the Secretaries of the Army and the Navy; and the Office of Management and Budget. We will make copies available to others on request. Please contact me at (202) 512-4841, if you or your staff have any questions concerning this report. Major contributors to this report were Tana Davis, John Warren, and Charles Ward. The following are GAO's comments to the Department of Defense's (DOD) letter, dated July 9, 1997. 1. We understand that the purpose of the Outrider Advanced Concept Technology Demonstration (ACTD) is to assess the utility of the Outrider system and note that DOD is acquiring 6 Outrider systems with 24 air vehicles under the original ACTD contract. If the Outrider is assessed positively, these could be used instead of building production representative systems under low-rate production. Specifically, DOD could modify the ACTD systems to create a production representative system that could be operationally tested prior to low-rate production. If required changes are so significant that the ACTD system cannot be successfully modified, DOD ACTD guidance indicates that a new competition should be conducted. 2. We agree that ACTDs should be based on mature technologies. However, DOD officials have acknowledged the Outrider system is not mature. We therefore continue to believe that DOD should resolve the integration challenges for Outrider before proceeding to a low-rate production decision. 3. Although DOD maintains that the development of Outrider is event rather than schedule driven, we note that DOD has not slipped the planned low-rate production decision or ACTD completion date in response to delays to the Outrider test schedule. 4. DOD states that it will demonstrate supportability prior to the full system acquisition. DOD ACTD guidance states that the full range of support areas must be considered if the plan for an ACTD is to transition to low-rate production. We believe that committing to further Outrider production without taking advantage of the opportunity to demonstrate supportability adds unnecessary risk to the planned acquisition program. 5. Our report specifically identifies the differences in the cost of a Predator ACTD system compared with a Predator production system. 6. We modified the text to clarify that the Outrider ACTD is based on joint requirements. 7. ACTD guidance points out that overall systems engineering efforts performed during the ACTD should include actions ensuring connectivity, compatibility, and synchronization of ACTD products with systems these products will operate with on the battlefield. Receipt of secondary imagery from the Outrider ground control station (level 1) does not provide any evidence that the tactical control system will be able to control or receive information directly from the Outrider air vehicle (levels 2 and 3). DOD's plan to demonstrate Outrider's compliance with tactical control system's interoperability standards during the ACTD is not the same as demonstrating that levels 2 and 3 can be achieved in the field. 8. DOD's response indicates a tactical Common Data Link (CDL) may be available for use in Outrider in less than 2 years. The ACTD is scheduled for completion in May 1998. If Outrider low-rate production were delayed until the CDL became available, DOD could avoid retrofit risks and expenses. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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GAO reviewed the Department of Defense's (DOD) acquisition of the Outrider, an unmanned aerial vehicle (UAV) system, through a streamlined acquisition process known as the Advanced Concept Technology Demonstration (ACTD), focusing on whether: (1) DOD is applying lessons learned from prior UAV programs to the Outrider; and (2) the Outrider is likely to meet user needs. GAO noted that: (1) DOD is not applying lessons learned from prior UAV programs to the Outrider ACTD; (2) for example, despite problems with the Pioneer and Hunter stemming from DOD's decision to award further production contracts without conducting operational testing or demonstrating that the system is user-supportable, DOD is pursuing the same strategy for the Outrider; (3) in addition, DOD has underestimated, as it did for the Pioneer and Hunter programs, the time and effort necessary to integrate nondevelopmental items into Outrider; (4) moreover, the Outrider system may not satisfy user needs unless problems associated with meeting joint requirements are resolved and interoperability with other DOD systems is ensured; and (5) consequently, DOD will not have assurance that the Outrider will meet user needs by the time of the planned fiscal year 1998 low-rate production decision.

As a result of coverage limits, restrictions, and exclusions in NFIP policies, insurance payments for flood damage may not pay all of the costs of repairing or replacing flood-damaged property. Certain NFIP limitations are embedded in statute; others have been promulgated by FEMA pursuant to its statutory authority. FEMA officials said that the coverage limitations are necessary to keep the NFIP self-supporting and actuarially sound. Thus, the program is designed to strike a balance between premium prices and coverage. The following are several examples of NFIP coverage limitations, restrictions, and exclusions that affect the premium and amount a claimant could expect to receive for flood damage: Homeowners are required to insure their homes for the amount of their federally backed mortgages. If a home is insured for less than 80 percent of its full replacement cost or the maximum coverage amount of $250,000, or it is not a primary residence, NFIP will pay the actual cash value for the damage. The actual cash value represents the original cost of the structure less depreciation and, in most cases, will not cover the full cost to repair damage to or replace the dwelling. The value of physical depreciation is based on the age and condition of the item. If a home is insured for 80 percent or more of its full replacement cost or the maximum coverage amount of $250,000 and is a primary residence, NFIP will pay replacement costs for damage to the dwelling. The policy defines replacement cost as coverage to replace the damaged part of the dwelling with materials of like kind and quality to what was damaged. The policy will pay the amount actually spent for this repair or replacement up to its limit. A homeowner may choose not to insure personal property under the program. A deductible amount is applied against claims for dwellings and personal property. Basements, which are defined as building areas below grade level on all sides, have limited coverage that does not include payment to repair or replace finished walls, floors, furniture, and other personal property. The personal property limit paid for jewelry, artwork, and home business equipment is $2,500 for all items combined. No coverage is provided on these items if they are located in a basement. Actual cash value, not replacement value, is paid on all covered furniture and other personal property. Thus, personal property is also depreciated. A detached garage is covered by the dwelling policy only if it is used solely for vehicles and storage. If the garage is improved (e.g., a sink is installed), flood damage to the structure is not covered under the NFIP. In a hypothetical property adjustment we developed with the assistance of FEMA's director of claims, a poorly maintained 30-year-old home located in a designated flood zone had flood damage when a nearby river overflowed. The property was valued at $60,000. It was insured under the NFIP for $30,000. Although a contractor estimated it would cost $40,000 to repair damages to the structure and personal property losses totaled another $10,000, a NFIP adjuster determined that payment on the claim was $8,000. The following circumstances reduced the amount of coverage: The homeowner had chosen not to insure his personal property. Because the homeowner did not insure the structure for at least 80 percent of its value, actual cash value will be paid for repairs or replacement of damage to the dwelling. Since the condition is poor, the actual cash value will be low. A $1,000 deductible will be applied. The adjuster determined that some problems that needed to be addressed had not been caused by the flood (e.g., leaking pipes in the bathroom and preexisting mold in the basement). Only limited coverage is allowed in the basement of the home, where the largest amount of damage occurred. The work of selling, servicing, and adjusting claims on NFIP policies is carried out by thousands of private sector insurance agents and adjusters who work independently or are employed by insurance companies or vendors under subcontract to insurance companies to handle their flood business. In contrast, according to a FEMA official, about 40 FEMA employees are responsible for regulating, managing, and overseeing the program, which is expected to grow to about 4.7 million policies in 2005. FEMA is assisted in this effort by about 170 contractor employees. According to FEMA, about 95 percent of the NFIP policies in force are written by agents who work for or represent 94 private insurance companies that issue policies and adjust flood claims in their own names. The companies, called write-your-own companies, receive an expense allowance from FEMA of about one-third of the premium amounts for their services and are required to remit premium income in excess of this allowance to the National Flood Insurance Fund. The insurance companies share the FEMA expense allowance with the agent selling and servicing the policy and a vendor, if the company has subcontracted with one to handle all or part of its flood insurance business. It is clear that some agents do not understand the program. It is very complex and different from the other lines of insurance. Flood insurance is much more complex than automobile and homeowners insurance. Some items of specific concern are definitions of elevated buildings and basements. Officials at FEMA, the four insurance companies, and the vendor said that they offered support to the insurance agents who sell and service NFIP policies. Reported support included training, help from telephone hotline customer service representatives, development of rate quotes, and Web sites with NFIP information. However, other than requiring that agents meet basic state insurance licensing requirements, neither FEMA nor the four insurance companies have historically required that agents complete training or demonstrate a basic level of knowledge of the NFIP to sell flood policies. When losses occur, flood adjusters employed by insurance companies or independent contractors become the eyes and ears of the NFIP. Claims adjusters are assigned to policyholders by their insurance companies after the policyholders have notified their agents of a flood loss and the agents have written loss reports. Adjusters are responsible for assessing damage; estimating losses; and submitting required reports, work sheets, and photographs to the claimants' insurance company, where the claim is reviewed and, if approved, processed for payment. They work under the coordination of a general adjuster assigned to manage claims adjustments for the flood event. Unlike agents who sell flood insurance policies, adjusters must be certified by FEMA to work on NFIP claims. To be approved to adjust residential flood losses, an adjuster must have at least 4 consecutive years of full-time property loss adjusting experience and have attended an adjuster workshop, among other requirements. To keep their certifications current, adjusters are required to take a 1-day refresher workshop each year and pass a written examination testing their knowledge each year. FEMA's program contractor maintains a database of independent adjusters who are qualified to adjust flood claims. A FEMA official said that 4,844 flood-certified adjusters are registered in the database, as of April 2005. A NFIP official noted that the adjuster community is stretched thin when a major flood event occurs. Adjusters and insurance companies are paid for claims settlements from the National Flood Insurance Fund based on the size of the losses they settle. The write-your-own company receives about 3.3 percent of the incurred loss, according to FEMA's NFIP claims director. Adjusters are to be paid at the time claims are settled based on a standard fee schedule. For example, an adjuster receives $1,000 for a claim of between $25,000 and $35,000. FEMA's primary method of overseeing the work of write-your-own companies is to conduct an operational review of every participating company at least every 3 years. In addition, FEMA relies on about 10 general adjusters employed by its program contractor to check the work of claims adjusters in reinspections of a sample of adjustments done after every flood event. According to the FEMA director of NFIP claims, one or two employees from FEMA's NFIP Claims and Underwriting sections go on-site to review the operations of write-your-own companies at least every 3 years. They do reviews more frequently, if necessary, to follow up on any findings from a previous visit. The auditors are to request that a random sample of 100 files be pulled for them to review. Files that are closed without payment and those with particularly large settlements are to be included in the sample of files reviewed. Auditors are to check the files for completeness and accuracy. For example, they must make sure that there are photographs to document damage. Auditors are also to look at internal controls in place at the company. If a write-your-own company does not pass an operational review, FEMA requires that it develop an action plan to correct the problems and schedules a follow-up review in 6 months to determine whether progress has been made, according to the NFIP director of claims. If the company continues to have problems and fails to implement an action plan, it can ultimately be withdrawn from the NFIP. According to FEMA officials, a company has been asked to withdraw from the NFIP once in the program's history. About 3 years ago, a write-your-own company was withdrawn from the NFIP in part because of issues raised in operational reviews and in part to other financial problems. Three of the four flood program managers for write-your-own companies whom we interviewed thought operational reviews were an effective way for FEMA to ensure that the NFIP is run according to established legislation and regulation. The fourth manager said that he had no opinion one way or the other. Interviewees noted that the reviews caught problems, and while FEMA had a small audit staff, the auditors were knowledgeable and provided about the right level of review. Two of the four flood program managers said that recent operational reviews had identified problems on policies they had recently purchased from other companies and that they were working to rewrite some policies and address other oversight issues. General adjusters are to do reinspections of open claims. FEMA chooses a random sample of about 4 percent of the claims for every flood event to reinspect, according to the NFIP claims director. If the general adjuster determines that a company paid for an expense that should not have been covered, FEMA is to be reimbursed by the write-your-own company. If a general adjuster finds that an adjuster missed an item in the original inspection, the general adjuster is to add it back into the claims report so that the policyholder will be compensated for it. The instructors at an adjuster refresher training session we attended noted the following as common errors identified in reinspections of claims: improper measurement of room dimensions; improper allocation of damage between wind and flood (homeowners' policies cover wind damage, while the NFIP covers flood losses); poor communication with homeowners on the process they are following to inspect the property and settle the claim. "I am in the flood insurance business because I believe in the program. It does a lot of good. Floods are horrible occurrences. A homeowner sees the water coming but can do nothing to stop it. The smell is horrible. Whole communities are affected, and the emotional toll is tremendous. I have seen the NFIP do great good for many people." Each of the interviewees, when asked how the NFIP could be improved, said that FEMA should look for ways to make the program less complex and more similar to other property insurance programs. For example, a vendor manager noted, "if the customers, the agents, and the adjusters all have difficulty understanding the program, it is too complicated." "As FEMA has tried to make the flood program more actuarily sound, it has made it more complex. FEMA has required of us more information, more forms, and more photos to be scanned into files. Those requirements cost money to implement. As an industry, we are looking at how the flood line might be more compatible with other lines of insurance business to be more cost-efficient. Now the flood business is so unique that it requires special handling." FEMA officials said that some documentation (i.e., elevation certificates) is required because the NFIP is part of FEMA's broader flood plain management strategy that combines insurance protection with hazard mitigation to reduce future flood damage to homes. The officials noted that, while the NFIP has different requirements than homeowners insurance, it is not necessarily more complex and that the more familiar agents become with the requirements of the NFIP, the easier it becomes for them to routinely handle documentation requirements. Congress mandated that within 6 months of the enactment of the Flood Insurance Reform Act, FEMA establish (1) insurance agent education and training requirements, (2) new processes for explaining coverage to policyholders when they purchase and renew policies, and (3) an appeals process for claimants who are dissatisfied with the settlement of their claims. The 6-month mandated deadline elapsed on December 30, 2004, but FEMA is still working to complete these mandated efforts. According to FEMA officials, in order to address the requirements to establish insurance agent education and training and for explaining coverage to policyholders, the agency must go through the rule-making process. FEMA officials also said to address the requirement for explaining policy coverage, they are waiting for DHS approval before finalizing the draft materials that will accompany the flood insurance policy. When DHS approves the draft materials, they will be published in the Federal Register as part of the rule-making process. Regarding the requirement for an appeals process, the agency must initiate and complete formal rule making. FEMA officials said that this process takes more than 6 months and could not be completed within the mandated time frame. To address the requirement in the Flood Insurance Reform Act of 2004 to establish insurance agent education and training requirements, FEMA is working with state insurance commissions. An official said FEMA is still in the planning stages of meeting the requirement and is discussing options with state insurance commissions, but has not yet developed an action plan. When a customer purchases a flood insurance policy, the main document he or she is to receive from the insurance agent is the policy. A congressional report accompanying the Flood Insurance Reform Act stated that the NFIP did not provide "simple" forms or claims guidelines for flood victims to follow, making access to information about flood insurance policies difficult to obtain. To address this concern, the act requires FEMA to provide simplified forms and a flood insurance claims handbook to policyholders at the time of purchase or renewal and at the time of flood loss. FEMA has drafted new materials that would be provided to the policyholder at the time of purchase or renewal of the flood insurance policy. The draft material includes: a supplemental form that would explain the policy, such as the amount of deductibles, the exact coverage being purchased, exclusions from coverage, and an explanation of how lost items and damages will be valued under the policy at the time of loss; a flood insurance handbook to describe procedures to be followed to file a claim and provide detailed information on an appeals process that FEMA is to develop; and an acknowledgment form that the policyholder has received the flood insurance policy and that the policy only covers building property for the dwelling and does not provide coverage for contents or personal property. Before the materials are finalized, FEMA must go through rule making and publish them in the Federal Register. FEMA expects to have these forms and handbook finalized by October 2005. If a policyholder has a grievance about a flood insurance claim, proof of loss, or loss estimate, he or she may informally appeal to the insurance agent, to the insurance adjustor's supervisor, or to a hotline where a customer representative is to provide assistance. There is currently no official recourse for the policyholder. To provide official recourse to policyholders, section 205 of the Flood Insurance Reform Act requires that FEMA establish a formal appeals process through which policyholders may appeal decisions on their claims. FEMA is developing a formal appeals process for a policyholder to follow if he or she has a grievance. The proposed new appeals process must go through the rule-making process with publication of a draft and a final set of procedures in the Federal Register. A FEMA official was uncertain when the process would be completed, but said that it would be after October 2005. Mr. Chairman and Members of the Committee, this concludes my prepared statement. I would be pleased to answer any questions you and the Committee members may have. For further information about this statement, please contact William O. Jenkins, Jr. Director, Homeland Security and Justice Issues, on (202) 512-8777 or [email protected] or Christopher Keisling, Assistant Director, Homeland Security and Justice, on (404) 679-1917 or at [email protected]. Major contributors to this testimony included Christine Davis, Pawnee Davis, and Deborah Knorr.

According to the National Flood Insurance Program (NFIP), 90 percent of all natural disasters in the United States involve flooding. Because of the catastrophic and unpredictable nature of floods, private insurance companies do not typically cover flood losses. Congress established the NFIP in 1968 to provide an insurance alternative to disaster assistance in response to the escalating costs of repairing flood damage. During congressional hearings on provisions of the Flood Insurance Reform Act of 2004, several legislators testified on NFIP shortcomings, as reported by constituents whose properties had been flooded by Hurricane Isabel in September 2003. The act required GAO to study coverage provided under the NFIP. It also required the Federal Emergency Management Agency (FEMA), the administrator of the NFIP, to take steps to address concerns about coverage and claims procedures. Today's testimony is based on work in progress to address this mandate. It provides preliminary information on (1) the types of coverage limits, restrictions, and exclusions under the NFIP; (2) how FEMA, in partnership with private insurers, manages and oversees the NFIP and the views of selected private sector program managers on how the program is working; and (3) the status of FEMA's efforts to comply with provisions of the Flood Insurance Reform Act. As a result of policy limits, restrictions, and exclusions, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing damaged property. Some limitations are embedded in statute and others have been promulgated by FEMA pursuant to its statutory authority. FEMA officials said that the coverage limitations are necessary to keep the NFIP self-supporting and actuarially sound. Thus, the program is designed to strike a balance between premium prices and coverage. For example, homeowners may choose not to insure personal property under the program. If they do elect to have this coverage, the value of personal property is depreciated. Basement coverage does not include payment to repair or replace finished walls and floors. The work of selling, servicing, and adjusting claims on NFIP policies is carried out by thousands of private sector insurance agents and adjusters under the regulation, management, and oversight of about 40 FEMA employees assisted by about 170 contractor employees. Agents are the main point of contact for policyholders. Four private sector NFIP managers we interviewed said that the agents have varying levels of NFIP knowledge. While training and support are available, historically neither FEMA nor the insurance companies have required completion of training or demonstration of basic program knowledge. Flood-certified adjusters are responsible for assessing damage and estimating losses when flooding occurs. Unlike agents, adjusters have mandatory training requirements. FEMA has oversight mechanisms in place to review the operations of the insurance companies and the work of adjusters. The private sector NFIP managers GAO interviewed were generally supportive of the program. However, they said that FEMA should find ways to make it less complex than and more similar to other property insurance programs. FEMA has taken steps to address its mandates in the Flood Insurance Reform Act, but it did not meet the 6-month timeframe specified. For example, to establish an insurance agent training requirement, an official said FEMA is discussing options but has not developed an action plan. To meet the requirement to provide "simple and complete information" to NFIP policyholders, FEMA has drafted materials explaining coverage, deductibles, and claim- and appeals-related procedures that it expects to have finalized by October 2005.

The HEA, as amended, specifies a formula, known as the federal need analysis methodology, to determine students' eligibility for federal need- based student aid. A student's need for financial aid is calculated using a formula that subtracts a student's expected family contribution (EFC) from the student's cost of attendance (COA). The EFC represents the applicant's household financial resources that are considered available to help pay for postsecondary education expenses and is calculated by reducing the financial resources reported by applicants by certain expenses and allowances, including state and other tax allowances. The factors used to calculate the EFC differ based on whether students are classified as financially dependent on their parents or are independent. For dependent students, the EFC is based on such factors as the student's and parents' income and assets, as well as family size and whether the family has other children enrolled in college. For independent students, the EFC is based on such factors as the student's and, if married, spouse's income and assets and whether the student has any dependents other than a spouse, as well as the number of family members enrolled in college. The COA at a postsecondary institution includes tuition, fees, books, and living expenses. If the COA is greater than the EFC, the difference between the two represents the student's financial need. For example, if a postsecondary institution has a COA of $10,000 and a student has an EFC of $4,000, the student is eligible for up to $6,000 of federal need-based aid. If the EFC is greater than the COA, the student is not eligible for federal need-based aid but may qualify for aid that is not need-based. In the 2007 to 2008 academic year, more than 12 million prospective students applied for federal student aid. Education requires student aid applicants to complete the FAFSA to collect students' data for the federal need analysis formula. Although the primary purpose of the FAFSA is to help Education distribute federal student aid, the form also accommodates the needs of state and institutional aid programs that rely on the FAFSA data for their own eligibility calculations. Prior to the creation of the FAFSA, separate application forms were required to apply for various types of federal, state, and institutional aid. As required by law, in 1992, Education streamlined the student aid application process by consolidating many of these forms into a unified FAFSA. Since then, Education has undertaken periodic efforts to modify the form's design and instructions and reduce data elements required of applicants. In addition, several amendments to the HEA have also modified the FAFSA by adding, for example, some new questions to the application. The 2009 to 2010 FAFSA consists of more than 100 questions that collect information ranging from basic contact information to the current value of assets. While less than half of the questions ask for financial information, many of these questions require applicants and the parents of dependent applicants to search for information located on tax returns as well as bank, business, and investment records. While both online and paper versions of the FAFSA are available, Education recommends that applicants file online to take advantage of features that are not available on the paper form, such as skip-logic, which allows applicants to skip questions that do not pertain to them. For example, independent students are not asked for their parents' financial information. The online FAFSA can also detect many errors prior to applicants' submission and allow the applicant to make corrections. If such errors are made on the paper form, they may take weeks to resolve, delaying financial aid eligibility notification from Education. According to Education, 98 percent of FAFSA applications are submitted online. Education's student aid application processing cycle covers an 18-month period. For example, applicants seeking federal aid for the 2009 to 2010 award year can submit a FAFSA from January 1, 2009, through June 30, 2010; however, most states and institutional aid programs have earlier FAFSA deadlines. After Education processes an applicant's FAFSA, a report is sent to the applicant or made available online. This report includes the applicant's EFC, the types of federal aid for which the applicant qualifies, and information about any errors--such as questions the applicant did not complete--that Education identified during FAFSA processing. Colleges send applicants award letters after admission, providing students with types and amounts of federal, state, and institutional aid, should the student decide to enroll (see fig. 1). Title IV of the HEA, as amended, authorizes the following federal aid programs. Grants. Generally, grants do not need to be repaid unless the recipient withdraws from school and owes a refund. They include the following types: Pell Grant. Grants to low-income undergraduate and certain postbaccalaureate students who are enrolled in a degree or certificate program and have federally defined financial need. For the 2009 to 2010 award year, the maximum award is $5,350. Supplemental Educational Opportunity Grant. Grants to undergraduate students with federally defined financial need. Priority for this award is given to Pell Grant recipients. In general, an annual award may not be less than $200 and may not exceed $4,000. Academic Competitiveness Grant. Grants to Pell-eligible students enrolled at least half-time in their first or second year of study who completed a rigorous secondary school program of study. First year students may receive up to $750, and second year students who have at least a 3.0 cumulative GPA at the end of the first year of study may receive up to $1,300. National Science and Mathematics Access to Retain Talent (SMART) Grant. Grants up to $4,000 per year to Pell-eligible students in their third or fourth year of study (or fifth year of a 5-year program) majoring in certain subject areas with at least a 3.0 cumulative GPA. Teacher Education Assistance for College and Higher Education (TEACH) Grant. Grants to undergraduate, postbaccalaureate, and graduate students who are taking or will be taking course work necessary to begin a career in teaching. TEACH provides up to $4,000 per year to recipients who agree to teach full-time in a designated teacher shortage area for 4 years, or the grant will be converted to a loan that must be repaid with interest. Work-study. Work-study is employment in on-campus or certain off- campus jobs for which students who have federally defined need earn at least the current federal minimum wage. The college or off-campus employer pays a portion of their wages, while the federal government pays the remainder. Work-study is awarded based on a student's need minus other aid awarded. Colleges participating in the program administer the funds and make award decisions based on the student's financial need. Loans. These are funds that are borrowed and must be repaid, with interest. Perkins Loan. Low interest--5 percent--loans made through participating schools to undergraduate and graduate students. Interest does not accrue while the student is enrolled at least half-time in an eligible program. Priority is given to students who have exceptional federally defined need. Undergraduate students can borrow up to $5,500 annually, and graduate students can borrow up to $8,000 annually. Stafford and Plus loans. Loans made by private lenders and guaranteed by the federal government (Federal Family Education Loan Program) or made directly by the federal government through a student's school (Direct Loan Program). Subsidized Stafford Loan. A loan made to students enrolled at least half-time in an eligible program of study and have federally defined financial need. The federal government pays the interest costs on the loan while the student is in school. The amount students can borrow is based on their year in school and whether they are classified as financially dependent on their parents or independent. Unsubsidized Stafford Loan. A nonneed-based loan made to students enrolled at least half-time in an eligible program of study. Although the terms and conditions of the loan (i.e., interest rates, etc.) are the same as those for subsidized loans, students are responsible for paying all interest costs on the loan. PLUS Loan. A nonneed-based loan made to credit-worthy parents of dependent undergraduate students enrolled at least-half-time in an eligible program of study, and credit-worthy graduate and professional degree students. Borrowers are responsible for paying all interest on the loan, and can borrow up to the cost of attendance minus any financial aid the student receives. Currently, dependent students may borrow combined subsidized and unsubsidized Stafford loans up to $5,500 in their first year of college, $6,500 in their second year, and $7,500 in their third year and beyond. Independent students can borrow combined subsidized and unsubsidized Stafford loans up to $9,500 in their first year, $10,500 in their second year, and $12,500 in their third year and beyond. There are aggregate limits for an entire undergraduate education of $31,000 for dependent students and $57,500 for independent students. Graduate and professional degree students can borrow combined subsidized and unsubsidized Stafford loans up to $20,500 per year, and their aggregate limit for undergraduate and graduate education generally cannot exceed $138,500. Many study group participants said using federal income tax data the government already collects on annual income tax forms could shorten the application process, making it easier on students and their families. Specifically, these participants proposed that relevant federal income tax data be directly transferred to the appropriate answer fields on each applicant's online FAFSA. With answers to as many as 20 FAFSA questions already collected on federal tax forms, such a change could decrease the quantity and complexity of the financial questions for the majority of applicants who complete the FAFSA with information from tax returns. Several participants said the FAFSA questions that take the longest to complete tend to be those that require applicants to search their tax forms for answers, such as questions on combined income and untaxed portions of retirement accounts. One participant noted that directly populating the FAFSA with tax data could particularly ease the burden on many first- generation college students and their parents, who may have less familiarity with the application process. Several participants also suggested that the use of federal income tax data could increase the number of applications completed, because fewer applicants would be discouraged by the number of questions they had to answer. One participant referred to her research showing that, by electronically populating an applicant's FAFSA with IRS data, an independent applicant could complete the online FAFSA in less than 10 minutes, on average. Another participant noted that financial questions are the source of most errors on the FAFSA, resulting in students and colleges spending additional time making corrections and verifying information. Currently, Education requires colleges to verify that up to 30 percent of their federal aid recipients provided accurate financial information. This process involves the school's financial aid office comparing an applicant's or his family's information on the FAFSA to supporting documentation, including tax returns that the student must provide to the school. Although 98 percent of applicants submit the FAFSA electronically, a few participants noted that some low-income applicants may not have reliable internet access in their homes. These participants said that applicants without such access would be more likely to complete a paper FAFSA and would not benefit from an electronic transfer of IRS data. Many study group participants proposed changes to the design and contents of the FAFSA that could help streamline the form and make the application process less daunting for prospective students. Instructions. Although Education has worked to clarify the online and paper FAFSA instructions in recent years, some participants said the length and complexity of the instructions continue to confuse applicants and should be further reduced and clarified. Beginning in January 2010, Education plans to improve instructions for the online FAFSA by customizing the directions for each question based on information the applicant has already provided. For example, if applicants enter their marital status as single, the directions for each question will only provide information pertinent to single FAFSA applicants. Tone. A few participants raised concerns about the tone of some questions on the FAFSA--saying they conveyed the wrong message to applicants--with one participant likening the application to a "beware of dog" sign instead of a welcome mat. For example, two participants recommended rewording a question that asks if applicants will attend college full-time or part-time, saying the question erroneously gives applicants the impression that they must commit to one of these options in order to apply for aid. However, this question is not used to determine federal aid eligibility, and students do not have to make this decision until they decide to enroll in college. Education has recently announced plans to make changes to the online FAFSA that are designed to encourage applicants to complete the application process. For example, in January 2010, Education plans to begin providing status indicators throughout the application that will inform students of their progress in completing the FAFSA. Skip-logic design. Several participants praised the online FAFSA feature--known as skip-logic--which allows applicants to bypass some questions that are not relevant to their student aid eligibility, based on their answers to previous questions. Education's recent expansion of skip-logic now allows applicants to bypass a selective service registration question unless they are male and younger most dependency questions if they are at least 24 years of age or married, three homeless determination questions unless they are 21 years of age or younger and answered yes to a question asking if they are homeless or at risk of being homeless, and all parental data for dependent applicants who only wish to apply for an unsubsidized loan if their parents refuse to provide their data on the FAFSA and refuse to provide financial support to the applicant. In addition, upcoming enhancements planned for January 2010 will allow applicants to skip asset information if they have low incomes and assets are not required to drug conviction questions if they are first-time college students, as federal aid eligibility is not affected by drug convictions that occur prior to college enrollment; and the state of legal residence and date of residency question if they confirm that, for at least the previous 5 years, their state of legal residence is the same as the state on their mailing address. Two participants recommended improving the skip-logic for financial questions by grouping together all questions requiring applicants to reference their tax forms and reordering the FAFSA questions to match the order in which data are collected on tax forms. Another participant noted that while skip-logic may be helpful for online applicants, it does not benefit the approximately 2 percent of individuals who complete the paper FAFSA. Content. Many participants offered recommendations to streamline the FAFSA's contents. A few participants suggested it would be helpful to know the extent to which each question is used in determining eligibility for federal, state, and institutional aid, since the value of information gained from particular questions may be outweighed by the potential loss of applicants due to the form's length. In addition, a few participants recommended significantly shortening the FAFSA by removing all questions not used to determine federal eligibility or financial need. For example, some states consider the highest level of education an applicant's parents have completed in targeting aid. However, some participants expressed concern that eliminating such questions from the FAFSA may cause states and colleges to develop additional forms in order to get the data they need, which could in turn increase the overall burden on applicants. One participant added that it might be difficult for colleges to get a comparable response rate if they tried to collect nonfinancial data. However, another participant suggested that colleges could collect this information on the acceptance form students submit after receiving letters of admission. Two participants also suggested eliminating questions currently asked on the FAFSA to determine aid eligibility--such as those regarding selective service registration and drug convictions--that are not used to calculate financial need. Many study group participants supported changing the need analysis formula to require less financial information from federal student aid applicants. Because the formula is specified by federal statute, any modifications would require legislative change. In discussing the need for a simpler formula, several participants noted both the sheer number of questions required to compute aid eligibility and the relative difficulty of answering the financial questions. For example, one participant stated that applicants have a far easier time answering questions about their marital status than they do complicated questions about their assets. In particular, participants discussed the merits of relying solely on a family's income-- as measured by adjusted gross income (AGI) on federal income tax forms--and the number of tax exemptions to determine aid eligibility. Similar proposals have been suggested previously. Such a shift would greatly reduce the number of financial questions asked on the FAFSA-- from more than 45 items to only 2--which several participants said could decrease the burden applicants face in completing the form. Nevertheless, a few state aid administrators we interviewed said they saw no need to change the current formula, and one added that the online form's skip- logic keeps the formula from being too burdensome for most applicants. Several participants also noted that a simpler formula could increase applicants' awareness of their potential financial aid eligibility, and perhaps increase the probability that they will go to college. For example, if eligibility were determined solely by AGI and number of tax exemptions, Education could publish a reference table that would allow students to estimate their aid eligibility far earlier in the aid application process and plan accordingly. Supplying applicants with earlier, more precise information on eligibility could ultimately render the EFC unnecessary, replacing the estimate of an applicant's or family's contribution to the cost of education with a direct calculation of federal aid eligibility. Several participants said that providing this type of early information could lead to an increase in the number of financial aid applications submitted and could encourage prospective students to apply for aid earlier in the cycle. In addition, participants said that reducing the financial information required by the formula could in turn simplify the verification process for financial aid administrators and applicants. If fewer financial items were included in the formula, financial aid administrators would have to collect and verify less information, and students selected for verification would similarly be relieved of the burden of providing large amounts of documentation. Many participants said that although it would make the application process easier on prospective students, reducing the amount of financial information collected would likely result in some change in the distribution of federal, state, and institutional aid, and would create new winners and losers among the pool of aid applicants. Participants differed in their assessment of whether the benefit of simplifying the formula outweighed the potential cost in how federal aid is distributed among applicants. For example, several participants were concerned that eliminating asset information from the federal formula could result in some applicants with high-value assets, such as large bank accounts or trust funds, receiving more need-based aid--such as Pell Grants--than they would under the current system. By potentially increasing the pool of applicants who qualify for need-based aid, eliminating assets could result in a smaller award amount for each Pell Grant recipient, as the maximum amount of the grant depends on program funding and can change each year. Several other participants, however, asserted that simplifying the formula would be beneficial to applicants--particularly those with the greatest need and those who do not currently apply--and is therefore worth the potential cost of a shift in who receives federal aid. One participant's research suggests that redistribution at the federal level would be relatively small if the formula included only AGI and number of tax exemptions. Specifically, she said she has found that approximately 85 to 90 percent of the variation in how the Pell Grant is awarded can be explained by those two factors. According to participants, formula changes could also affect the distribution of state and institutional aid to varying degrees, as many states and institutions use the eligibility determinations from the FAFSA to allocate their awards. Consequently, some participants were concerned that--much like with federal aid--the removal of asset data from the formula could increase the overall pool of eligible award recipients, and in turn reduce the size of state and institutional financial aid awards available to the neediest applicants. Some participants asserted that, while a change in the formula may not greatly affect Pell-eligible students, state and institutional need-based aid reaches into middle income ranges where the implications may be far greater. One of these participants added that when her state modeled what would happen to its aid program if it eliminated assets from the eligibility formula, it found that expenditures would increase by 12 percent. Because her state, like many others, has a program in which all eligible applicants are entitled to receive aid, she explained that such a change would result in the state either having to cover additional costs or providing less money to each eligible student. For a few participants, concerns over how formula changes might affect state aid extended to the way in which family size is calculated. These participants said that the number of tax exemptions is a poor measure of the household size of an applicant or applicant's family. For example, some children or other family members may live with an applicant but not be listed as dependents on tax forms. However, other participants countered that household size is already difficult to measure accurately under the current formula. Several participants recommended further analysis on how and to what extent applicants for both federal and state aid would be affected by possible changes to the federal formula. Many participants stressed that, as federal aid does not cover the entire cost of education for most students, the information needs of states and institutions must be addressed in any plan to simplify the federal formula. Two participants, however, maintained that it was not reasonable to expect a single application to serve the needs of both the federal aid program and programs from all states and institutions. Education's recent proposal to limit the federal formula to financial information available through federal income tax forms would eliminate 26 financial questions--including those on assets--while retaining up to 20 financial questions that could all be answered with federal income tax data. Although such a formula would decrease the burden on applicants, one participant noted that it would not be concise enough to allow for a simple reference table that prospective students could use to estimate aid eligibility, as it would if it were limited to AGI and tax exemptions. Proposed legislation passed by the House of Representatives and under consideration in the Senate would simplify the student need analysis formula by setting an asset cap for some aid programs and eliminating assets from the need analysis of students whose families do not equal or exceed the cap. While many study group participants noted the potential benefits of using IRS data to populate the online FAFSA, some raised questions about the feasibility and limitations of this approach. Applicants currently complete the FAFSA with income information from the tax year prior to the beginning of the school year for which they are applying for aid. For example, an applicant who completed the FAFSA with the intent of beginning college in fall 2009 is required to use 2008 income information. However, Education officials said that because the tax calendar permits most tax filers to file their income taxes for the prior calendar year as late as April 15, the IRS could not make tax data electronically available to student aid applicants until July. Some participants said that besides not giving students sufficient time to plan for college costs, completing the FAFSA this late would cause many students who plan to enroll in the fall to be ineligible for aid from states and colleges. Acknowledging these limitations, Education officials said making the electronic transfer of IRS tax data to the FAFSA feasible for fall college applicants would likely require the use of income data that would be one year older than the information Education currently uses to determine financial aid eligibility. For example, under this scenario, an online applicant who completed the FAFSA in March 2009 with the intent of beginning college in August 2009 would be required to use income tax data from 2007. As of July 1, 2010, the Higher Education Opportunity Act authorizes the Secretary of Education to allow such older data to be used in calculating applicants' aid eligibility. However, some participants expressed concern that by using older data-- often referred to as prior-prior year data--there is an increased risk that the data may no longer reflect an applicant's current economic need. For example, a college applicant could have a higher or lower income than they did two years prior to attending college. Currently, school financial aid officials can use professional judgment to change an applicant's eligibility for aid upon an applicant's request, if they determine that there are special circumstances. For example, applicants may request professional judgment if they think their financial aid award does not match their current economic need. Participants said that while professional judgment may be used to increase or decrease an applicant's financial aid, it is unlikely that applicants with an improved economic status will ask their colleges to use professional judgment to decrease their student aid award. Therefore, some participants said they think that this will lead to increases in the numbers of applicants eligible for federal and state aid. However, one participant noted that although the implementation of using prior-prior year tax data would likely cause an initial increase in applicants qualifying for aid, the cost might level off in subsequent years. In addition, some participants expressed concern about the possible effects of using prior-prior year data on applicants who are not required to file income taxes. According to Education, about 6 percent of dependent applicants' parents and about 13 percent of independent applicants who completed the FAFSA in the 2008 to 2009 academic year did not file taxes. One participant said that although it may be challenging for tax-filing applicants who submit paper forms to find tax forms from up to 2 years earlier, it would likely be particularly difficult for applicants who do not file taxes to provide information on their income from 2 years earlier. A few participants also expressed concern that Education had not offered a plan to simplify the FAFSA for applicants not required to file income taxes. Education's recent proposals do not address how changes would affect these applicants. Education plans to begin providing applicants who both complete the FAFSA and enroll in college between January 1 and June 30, 2010, with the option of electronically transferring IRS data into the online FAFSA. Education officials said this pilot is feasible since spring 2010 applicants are required to use income tax information from 2008, which the IRS can make available electronically. Education officials stated that during the spring 2010 online FAFSA sessions, a question on the screen will ask if applicants would like to electronically retrieve their IRS tax data--or their parents' data if they are dependents--to answer financial questions. If the applicants agree, they will be taken to an IRS Web site to confirm their identity and obtain tax information that they can electronically transfer into the appropriate FAFSA fields with a single push of a button. After piloting this electronic transfer of tax data with spring applicants, Education plans to make it available to all students who apply online for aid between July and December 2010. Some study group participants said Education's plan to pilot the electronic transfer of IRS tax data to the FAFSA is a good initial step. Eventually, should Education elect to use its new statutory authority to allow the use of prior-prior year data, the option of electronically transferring IRS data into the online FAFSA could be made available to all applicants year-round. One participant said that additional piloting will be needed if Education ultimately decides to base student aid eligibility on prior-prior year tax data. Many participants noted ways in which other technology could facilitate additional improvements to the application process. One such possibility would be in better linking the electronic applications for federal and state aid. In 2001, Education began piloting a link between the online FAFSA and New York's online state aid application. Currently, New York residents who submit the online FAFSA are immediately provided a link to the New York state aid Web site. Once New York applicants register and receive a personal identification number from the state student aid office, they may begin the online application process for state aid. The New York online application is automatically populated with FAFSA data that are sent electronically from Education. Applicants are asked to verify that the populated information is correct, and may be asked for additional information not collected by the FAFSA, such as their spouse's social security number. Many participants said linking the FAFSA to other state application sites could prevent the possible negative effects on state aid programs of changing the federal need analysis formula by allowing states to ask additional questions that are not available on the FAFSA. One participant further noted that providing states with this option could make it feasible for Education to eliminate all FAFSA questions not needed to determine federal student aid eligibility without affecting the needs of states. However, a few participants expressed concern that such a change could lead to states adding a large number of additional questions on their applications, jeopardizing Education's efforts to streamline the overall application process for students. Other participants said that the cost of setting up state online applications could create a barrier that would prevent some states from linking to the FAFSA. Beginning in January 2010, Education plans to offer this type of connection to all states, but the costs to states--and whether Education will provide financial assistance to states to facilitate this change--are not yet known. In addition to technological improvements, participants suggested that efforts to simplify the application should be accompanied by a strategy to increase public outreach efforts. For example, one study group participant suggested that Education should reach out to students from middle school through high school to help raise awareness about the affordability of college and the process of applying for financial aid. Some participants also suggested that Education provide monthly updates to states and colleges by zip code about how many students have completed the FAFSA. They said that this could help officials better target certain geographical areas with low FAFSA completion rates to raise awareness about student aid eligibility. Other participants suggested that Education send parents with children in middle school through high school annual estimates of their child's current eligibility for student aid. Education has announced its intent to launch public outreach efforts that are designed to inform high school students about the availability of federal aid for college beginning in fall 2009. In creating an application process to distribute student aid, the federal government has had to consider multiple competing demands to promote college access and affordability: developing a formula precise enough to ensure that resources reach the target population, collecting enough information to assist states and institutions in administering their own aid programs, and making the application process easy to use and transparent for applicants. This last issue has proven particularly challenging, and the complexity of the application form and underlying formula has become a pain point for students and their families. The prospect that the application itself may discourage students from applying for aid--and perhaps to college--is especially troubling in light of current economic conditions, as postsecondary access and affordability become more challenging for some students. Our study group participants proposed various options for mitigating some of the complexity in the application process, and Education has proceeded with the early phases of its new plan for simplification, which includes a public outreach component. While most of these changes will result in streamlining the application process and will not affect eligibility for federal, state, and institutional aid, some-- as is often true of policy and process changes--come with trade-offs. In particular, any changes to the formula used to compute eligibility may result in new winners and losers among aid applicants. Because the formula is complicated and no means of calculating eligibility--including the current method--is a perfect prediction of financial need, the effects of potential modifications on the pool of eligible applicants must be weighed against the goals of federal student aid. The issue to be considered is whether the benefit of simplifying the formula outweighs the potential loss in the precision of how aid is targeted, and depends not only on how great the overall change in the distribution of federal aid is, but on how much various types of applicants gain or lose. We provided a draft of this report to the Department of Education, Department of Treasury, and the Internal Revenue Service for review and comment. These agencies had no comments on the draft report. We are sending copies of this report to relevant congressional committees, the Secretaries of Education and Treasury, the Commissioner of Internal Revenue, and other interested parties. In addition, this report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any additional questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in Appendix III. Simplifying the Federal Student Aid Application Process A Government Accountability Office Expert Panel Breakfast available in the room Approaches to shortening the form and changing the application process What are some approaches to shorten the Free Application for Federal Student Aid or otherwise make it less time-consuming to complete? How do states and institutions use the data collected on the current application form? What are the possible risks of simplifying the application form? Break Approaches to changing the statutory need analysis formula How could the statutory need analysis formula be changed to reduce the amount of financial information collected, without causing significant redistribution of federal grants and subsidized loans? What are the possible risks of simplifying the need analysis formula? Following any modifications to the need analysis formula, what are the best means of addressing the needs of states and institutions that rely on the federal application to administer their own aid program? Working lunch with presentations from other GAO engagements related to student financial aid issues Operationalizing changes to the application form and underlying formula What is the feasibility of the IRS providing individuals' financial data directly to the Department of Education for the purposes of determining aid eligibility? How can changes to the application form and underlying formula be operationalized? Debra Prescott, Assistant Director; Rebecca Woiwode, Analyst-in-Charge; and James E. Lloyd III made significant contributions to this report in all facets of the work. In addition, Jean McSween and Luann Moy assisted in design; Sheila R. McCoy and Doreen Feldman provided legal support; Mike Brostek, Dave Lewis, and Ron Fecso lent subject matter expertise; Susannah Compton provided writing assistance; and James Bennett provided help with graphics.

Federal student aid is intended to play an integral part in fulfilling the promise of greater academic access and success for less affluent students. However, many experts have expressed concern about the length and complexity of the Free Application for Federal Student Aid (FAFSA) and the statutory need analysis formula used to determine aid eligibility. The Higher Education Opportunity Act required GAO to form a study group to examine options and implications in simplifying the financial aid process. The study group focused on (1) identifying ways to shorten the FAFSA and make it less burdensome to complete, (2) identifying changes to the statutory need analysis formula that would reduce the amount of financial information required by the FAFSA without causing significant redistribution of federal and state student aid, and (3) determining how any changes to the FAFSA and the statutory need analysis formula could be implemented. To address these questions we convened an expert panel on May 7, 2009, and conducted additional interviews with experts. This summary captures the ideas and themes that emerged at the panel and during interviews. It does not necessarily represent the views of GAO or of the organizations whose representatives participated in the study group. Study group participants said using federal income tax data that the government already collects and revising the form could shorten the application process, making it easier on students and their families. Many participants proposed that relevant federal income tax data be directly transferred to the appropriate answer fields on each applicant's online FAFSA, an approach that the Department of Education (Education) plans to pilot for some applicants in January 2010. Such a change could decrease the amount and complexity of some of the financial questions on the application. In addition, many participants proposed changes to the design and contents of the form to clarify and streamline the application. Education has recently taken steps to shorten and reorganize the online form and has plans for further improvements. Participants said changing the federal formula to reduce required financial information would ease applicants' burden, but such a shift would likely result in some change in the distribution of aid. Many study group participants supported changing the need analysis formula to rely solely on a family's income and number of tax exemptions to determine aid eligibility. These changes would greatly reduce the number of complicated financial questions on the FAFSA. However, reducing the amount of financial information collected could change the distribution of federal, state, and institutional aid, prompting some concern about this approach. Education's recent legislative proposal to limit the formula to financial information available through tax forms would eliminate 26 financial questions, including those on assets. Participants said technology and public outreach efforts could improve the federal student aid application process, but successful implementation of changes hinges on the ability of federal and state agencies to address several challenges. While it is feasible to electronically transfer tax data directly from the Internal Revenue Service (IRS) to the FAFSA by using income data one year older than what is currently required, participants expressed some concern about the potential implications of such a change. Specifically, using older tax data might result in increased aid eligibility for some applicants whose data may not reflect their current economic needs. In addition, it may be more difficult for applicants who do not file taxes to provide sufficient documentation of their income from two years earlier. Education and the IRS have begun developing a plan to allow some applicants to electronically access their tax data when they apply for aid online. However, because taxpayers can submit their data as late as April 15, these data will not be available in time to accommodate most aid applicants. Many participants also called for linking state aid Web sites to the online federal application to mitigate the potential effects of federal formula changes on state aid. Education plans to offer this option to states in January 2010. In addition, participants said that efforts to simplify the application process should be accompanied by a public outreach strategy aimed at increasing knowledge of the availability of federal student aid. Education plans to undertake a public outreach campaign beginning in fall 2009.

When the WTC buildings collapsed on September 11, 2001, an estimated 250,000 to 400,000 people in the vicinity 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 responders. Subsequently, an 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, were also exposed. 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. Many health effects have persisted or worsened over time. 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. A recent 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. Commonly reported mental health effects among responders and other affected individuals included 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 have also been reported. The five programs that were created for monitoring the health of WTC responders vary in aspects such as the implementing agency (i.e., federal, state, or local governments or private organizations) and eligibility requirements. (See table 1.) Each program received federal funding, the majority of which was provided by the Department of Homeland Security'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. FEMA is authorized to use a portion of its WTC-related funding for screening and long-term monitoring of responders. With regard to treatment, however, FEMA may generally 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 the health monitoring programs. OPHEP, which coordinates and directs HHS's emergency preparedness and response program, entered into separate interagency agreements with FOH to implement the federal responder screening program for current federal workers and with NIOSH to implement the screening program for former federal workers. We reported in February 2006 that four of the five monitoring programs had made progress in screening and monitoring affected individuals and gathering data. (See table 1.) These four programs--the FDNY WTC Medical Monitoring Program, the worker and volunteer WTC program, the New York State responder screening program, and the WTC Health Registry--had collected information that monitoring officials said could be used by researchers to help better understand the health consequences of the attack and improve treatment, such as by identifying which types of treatment are effective for specific conditions. In contrast to the progress made by the other programs, the HHS WTC Federal Responder Screening Program had lagged behind and accomplished little. The program was established to provide free voluntary medical screening examinations for 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 WTC health monitoring program. Through March 2004, the program--which started about a year later than the other WTC monitoring programs--completed screenings of 394 federal workers. HHS put the program on hold in January 2004, when it stopped scheduling new examinations, because it wanted to resolve several operational issues, including HHS's determination that FOH did not have the authority to provide examinations to people who are no longer in federal service. Under an agreement between OPHEP and FOH that was established in July 2005, the program resumed providing examinations for current federal workers in December 2005, and in February 2006, OPHEP executed an agreement with NIOSH calling for NIOSH to arrange for the worker and volunteer WTC program to provide examinations to former federal workers. Many participants in the monitoring programs required additional testing or needed treatment for health problems that were identified during screening examinations. The FDNY WTC Medical Monitoring Program referred participants to the FDNY Bureau of Health Services, but the other programs primarily referred participants to their primary care physician or to privately funded programs available to responders, such as treatment services provided by the Mount Sinai clinical center that are funded by the American Red Cross. We previously reported that officials told us that finding treatment services for such participants was an important, but challenging, part of the programs' responsibility. For example, officials from the worker and volunteer WTC 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. In December 2005, the Congress appropriated $75 million to CDC to fund programs providing baseline screening, long-term monitoring, and health care treatment for emergency services and recovery personnel who responded to the WTC disaster. The law required CDC to give first priority to programs coordinated by the FDNY-BHS, Mount Sinai-Irving J. Selikoff Center for Occupational and Environmental Medicine, and New York City Department of Health and Mental Hygiene, which have existing monitoring programs, and to programs coordinated by the POPPA program and Project COPE. The mission of the POPPA program, which offers peer-to- peer mental health counseling to New York City Police Department (NYPD) officers, is to reduce unresolved emotional trauma that can result in problems ranging from poor performance to suicide. The POPPA program counseled over 5,000 NYPD officers in the 10 months following the WTC attack. Project COPE, a collaboration of the New York City Police Foundation and Columbia University Medical Center, uses a hotline and outreach efforts to encourage NYPD uniformed and civilian employees to obtain mental health services, which are provided by Columbia University Medical Center and private providers. As of August 2006, over 18,000 employees had attended educational sessions held at police facilities, and over 5,000 had received individual counseling or therapy consultations. Since February 2006, an additional 1,385 federal responders have registered for screening examinations, bringing the total number registered on the WTC Federal Responder Screening Program Web site to 1,762 as of late August 2006, including 283 former federal workers. Because the total number of federal responders involved in the WTC disaster is uncertain, it is not possible to determine what proportion of the total number of federal responders have registered. HHS's efforts to conduct outreach to federal agencies resulted in the identification of 2,200 federal responders. As of late August 2006, FOH had completed screening examinations for a total of 907 federal workers, 380 of whom were screened since February 2006. Through OPHEP's agreement with NIOSH, the worker and volunteer WTC program has provided screening examinations to 13 former federal workers and scheduled 11 more. Most of the former federal workers reside outside the New York metropolitan area, where the worker and volunteer WTC program is located, and NIOSH is working to establish a national network of providers to screen these workers. HHS reported that as of late August 2006, a total of 1,762 federal responders had registered for screening examinations on the WTC Federal Responder Screening Program Web site, including 1,479 current federal workers and 283 former federal workers. Of the 1,762 federal responders who registered, 1,385 had registered since February 2006, including 1,134 current federal workers and 251 former federal workers. It is not possible to determine what proportion of the total number of federal responders involved in the WTC disaster have registered because the total number involved is uncertain. In determining the total number of individuals eligible for its program, the WTC Health Registry developed an estimate of 8,621 federal responders, based on information from 31 federal agencies in the New York area and information from FEMA on 22 Urban Search and Rescue teams that were deployed to the WTC area. This estimate does not account for all federal responders from other geographic areas. As we reported previously, in the aftermath of the WTC disaster, HHS did not have a comprehensive list of all federal agencies and federal responders who were involved. In an effort to develop such a list, OPHEP and ATSDR entered into an agreement in April 2005 for ATSDR--which had developed the WTC Health Registry--to identify and register federal responders. Under the agreement, ATSDR, through a contractor, contacted federal agencies, developed a list of WTC federal responders, and conducted outreach to encourage the responders to register on the new Web site that the contractor established. As a result of this effort, 46 federal agencies were identified and provided contact information for 2,200 federal responders. The agreement between OPHEP and ATSDR expired on April 30, 2006, ending the outreach efforts to federal agencies. Under an agreement with OPHEP, NIOSH assumed responsibility for maintaining the WTC Federal Responder Screening Program Web site through December 31, 2006. As of late August 2006, FOH had completed screening examinations for a total of 907 of the federal workers who had registered; 380 of the 907 were screened since February 2006. Under its agreement with OPHEP, FOH is responsible for regularly retrieving from the registration Web site requests for screening examinations for current federal workers and for assigning individuals to a provider for screening. FOH officials told us that they contact the individual and the provider to inform them of the need to arrange an appointment for screening. The program relies on individuals to call the designated provider and schedule their appointment. FOH officials told us that individuals who have registered do not always contact the provider to schedule an appointment or may not keep an appointment or call to reschedule it. FOH officials said that they have attempted to contact such individuals but often received no response. We reported in our February 2006 testimony that under the July 2005 agreement FOH clinicians can refer current federal workers for follow-up care if the screening examination--which includes a medical questionnaire, clinical tests such as a chest X-ray, and a full physical examination--reveals significant physical or mental health symptoms. On July 31, 2006, FOH told us that it had referred 39 current federal workers with mental health symptoms to an FOH employee assistance program (EAP) for counseling; 24 to ear, nose, and throat specialists; 19 to pulmonary medicine specialists; and 1 to a cardiology specialist. As of late August 2006, 283 former federal workers had registered to receive screening examinations, which under OPHEP's agreement with NIOSH are to be provided by the worker and volunteer WTC program. Under the agreement, former federal workers receive a one-time examination comparable to the examination that FOH is providing to current federal workers. As of July 31, 2006, 13 screening examinations had been completed and 11 were scheduled. These completed and scheduled examinations are in addition to the 139 former federal workers that FOH screened after the WTC Federal Responder Screening Program resumed because FOH thought they were current federal workers. A key challenge in providing screening examinations to former federal workers has been that a large number do not reside in the New York metropolitan area, where the worker and volunteer WTC program is based. The 283 former federal workers who have registered for screening examinations reside in 40 states, and about 240 of them reside outside the New York metropolitan area. NIOSH officials said that making arrangements to screen these widely dispersed responders has presented challenges, such as ensuring that the arrangements comply with federal privacy protections. NIOSH is negotiating with the Association of Occupational and Environmental Clinics (AOEC) in an effort to establish a national network of providers to screen these federal workers. CDC plans to award the $75 million appropriated for screening, monitoring, and treatment to the five organizations that the law identified as having priority for funding. CDC officials expect to make awards to the WTC Health Registry, Project COPE, and the POPPA program over a 3-year period and to award funds to the FDNY WTC and worker and volunteer WTC programs in response to their treatment costs. CDC officials have a proposed spending plan but told us that because they are uncertain about how quickly treatment costs could deplete the available funds, they may need to make adjustments. Officials from the FDNY WTC and worker and volunteer WTC programs told us that they expected that their estimated portion of the appropriated funds would be depleted well before the end of 3 years. As of August 2006, CDC awarded about $4.5 million of the $75 million--about $1.9 million to the WTC Health Registry, $1.5 million to the FDNY WTC program, and almost $1.1 million to the worker and volunteer WTC program. In addition, CDC expects to award $1.5 million to the POPPA program and $3 million to Project COPE in September 2006. CDC is waiting to make further awards until agency officials have reached certain decisions about the coverage of treatment services, such as which prescription drugs would be covered in the FDNY WTC and worker and volunteer WTC programs. CDC expects to begin making further awards around February 2007. CDC has decided to award the $75 million for screening, monitoring, and treatment that was appropriated to the agency in December 2005 to the five organizations identified as having first priority for funding. The organizations to which CDC plans to provide funds are the FDNY WTC program, for monitoring and treatment; the worker and volunteer WTC program, for monitoring and treatment; the WTC Health Registry, for monitoring; Project COPE, for treatment; and the POPPA program, for treatment. CDC plans to make awards through cooperative agreements with the programs. In general, it plans to send letters to the organizations inviting them to submit applications for funding; the applications would then undergo a two-stage peer review process. At the first stage a panel of outside experts would assess the merit of the application, and at the second stage CDC officials would determine the amount of funding the applicant would receive. CDC has made preliminary decisions about how to allocate the $75 million among the five organizations. As of September 1, 2006, CDC's proposed spending plan indicated that awards would be made in the following way: $53.5 million for treatment and $8 million for monitoring, to be divided between the FDNY WTC and worker and volunteer WTC programs; $9 million for the WTC Health Registry; $3 million for Project COPE; and $1.5 million for the POPPA program. CDC officials expect to make awards to the WTC Health Registry, Project COPE, and the POPPA program over a 3-year period, but are not sure over what period they will make awards to the FDNY WTC and worker and volunteer WTC programs. A CDC official told us that the agency would award funds to the latter two programs in response to the treatment costs they incur. He said that agency officials are uncertain about how quickly treatment costs could deplete the available funds, because CDC does not know how many additional people will seek monitoring and what the extent of their treatment needs will be. For example, previous media reports about illnesses diagnosed in responders have resulted in increases in responders seeking examinations. Officials from the FDNY WTC and worker and volunteer WTC programs told us that they expected that their estimated portion of the appropriated funds would be depleted well before the end of 3 years. CDC has developed a proposed spending plan that indicates that about 36 percent of the funds would be awarded by the end of fiscal year 2007 and about 63 percent would be awarded during fiscal year 2008, although a CDC official told us that, depending on the extent of treatment needs, the funds could be used more quickly. The current plan is based in part on an agreement CDC made with the American Red Cross in April 2006. According to a CDC official, under this agreement, American Red Cross funds would be used for the treatment services that are eligible for American Red Cross support--such as basic clinical examinations and certain tests--for as long as such funds are available and the CDC funds would be used to cover other program expenses--such as infrastructure costs, more sophisticated diagnostic tests, and the conversion of medical records into an electronic format. As of August 2006, CDC had awarded a total of about $4.5 million of the $75 million to the WTC Health Registry, FDNY WTC program, and worker and volunteer WTC program. According to CDC officials, the WTC Health Registry applied for about $1.9 million in April 2006 for continuation of its collection of health data, and CDC awarded the registry $1.9 million in May 2006 and about $56,000 in July 2006. On August 10 and 11, 2006, respectively, the worker and volunteer WTC and FDNY WTC programs submitted applications to CDC for funds related to treatment services. In response to these applications, CDC made what an agency official termed emergency awards to the FDNY WTC and worker and volunteer WTC programs on August 11, 2006. CDC provided $1.5 million to the FDNY WTC program for leasing treatment space that previously had been provided by New York City at no cost. CDC provided almost $1.1 million to the worker and volunteer WTC program to hire an additional physician to help reduce the 3- to 4-month waiting time for treatment appointments that recently developed at the Mount Sinai clinical center, as well as to hire three administrators and a medical assistant. Officials from the clinical center told us that this waiting time had developed because additional people were seeking monitoring due to media reports about illnesses diagnosed in responders and because the proportion of responders who needed to be referred for treatment had increased. In addition to having awarded about $4.5 million, CDC plans to award an additional $4.5 million in September 2006. In spring 2006, CDC invited Project COPE and the POPPA program, two programs that provide mental health services to members of the NYPD, to apply for funding through a peer review process. In their applications, the POPPA program requested $1.5 million over 3 years, and Project COPE requested funding of $3 million over 3 years. CDC received their applications in June and July, respectively, and plans to implement the application review process in time to be in a position to make awards in September 2006. CDC does not plan to award additional funds from the $75 million to the FDNY WTC and worker and volunteer WTC programs until it makes certain decisions about the coverage of treatment services. These decisions include determining which medical conditions will be covered; developing a prescription drug formulary, that is, the list of drugs that will be covered; and determining the extent to which inpatient care will be covered. CDC officials said that they expected to make the coverage decisions in late 2006 and that they would obtain input from the American Red Cross and the programs. A CDC official told us that making decisions about which prescription drugs to cover could be the greatest challenge CDC and the programs face, because of the potentially high cost of drugs needed to treat responders. An FDNY WTC program official said that prescription drug costs are a looming financial problem for the FDNY WTC program. The CDC official told us that the most common diagnoses of WTC responders-- gastroesophageal reflux disease, obstructive pulmonary disease, and mental health conditions--frequently are treated with prolonged and expensive drug therapy. For example, medications for respiratory therapy can cost $1,000 a month and may continue for a year. The FDNY WTC program official estimated that 100 percent coverage of prescriptions for firefighters and emergency medical technicians could cost $10 million to $18 million per year and potentially consume all of the funding that CDC would provide to the program. Clinicians at the worker and volunteer WTC clinical center at Mount Sinai stated that spending on prescription drugs at their center was increasing by $5,000 to $10,000 each month and amounted to $60,000 in July 2006. Another coverage decision that CDC faces is to determine the extent to which inpatient care will be covered. Currently, the FDNY WTC and worker and volunteer WTC programs provide only outpatient care, but officials involved with these programs believe that the treatment funds from the $75 million should cover some inpatient care, such as when a responder's WTC-linked asthma becomes exacerbated to an extent that requires hospitalization. CDC officials told us that they plan to reach decisions about treatment coverage in fall 2006. They also plan to invite the FDNY WTC and worker and volunteer WTC programs to submit applications for treatment funding in the fall. If the applications are submitted by December 2006, CDC officials expect to be able to review them in time to provide funding to the programs by February 2007. CDC is also in the process of resolving issues related to providing access to screening, monitoring, and treatment services for WTC responders, including former federal workers, who reside outside the New York metropolitan area. CDC is negotiating with AOEC about possibly using AOEC clinics around the country to provide these services. CDC officials told us they intend that monitoring and treatment services available to responders around the country would be comparable to services provided by the worker and volunteer WTC program. 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; Fred Caison; Anne Dievler; Keyla Lee; and Roseanne Price 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. 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Responders to the World Trade Center (WTC) attack--individuals involved in rescue, recovery, or cleanup--included New York City Fire Department (FDNY) personnel, federal government workers, and others from New York and elsewhere. They were exposed to numerous hazards, and concerns remain about the long-term effects on their physical and mental health. In February 2006, GAO testified that four of the five key federally funded programs that were monitoring health effects in responders had made progress but that the Department of Health and Human Services' (HHS) WTC Federal Responder Screening Program, implemented by the Office of Public Health Emergency Preparedness (OPHEP), lagged behind (GAO-06-481T). GAO also reported that the Congress appropriated $75 million in December 2005 to HHS's Centers for Disease Control and Prevention (CDC) for monitoring and treatment for responders and that CDC was deciding how to allocate the funds. This statement updates GAO's February 2006 testimony. GAO examined (1) progress made by HHS's WTC federal responder program and (2) actions CDC has taken to award the $75 million appropriated. GAO reviewed program documents and interviewed HHS officials and others involved in WTC monitoring and treatment programs. The WTC federal responder program has registered and screened additional federal responders since February 2006, and arrangements are being developed to screen responders who are former federal workers residing outside the New York area. An additional 1,385 federal responders have registered for screening, including 1,134 current federal workers and 251 former federal workers, bringing the total number registered as of late August 2006 to 1,762, including 283 former federal workers. Because the total number of federal responders is uncertain, the proportion of the total who have registered is unknown. As of late August 2006, Federal Occupational Health Services (FOH) had completed screening of 907 federal workers, 380 of whom were screened since February 2006. Under an OPHEP agreement with CDC's National Institute for Occupational Safety and Health (NIOSH), former federal workers are being screened through the worker and volunteer WTC program, one of the five key federally funded programs. As of July 31, 2006, the worker and volunteer WTC program provided screenings to 13 former federal workers and scheduled 11 more, and 139 former workers had been screened by FOH as part of the 907 workers. Most of the former federal workers reside outside the New York area, where the worker and volunteer WTC program is located, and NIOSH is working to establish a national network of providers to screen these workers. CDC has awarded a small portion of the $75 million appropriated for screening, monitoring, and treatment and plans to make decisions about treatment coverage before awarding most of the funds. The agency plans to award the $75 million to the five organizations that the law identified as having priority for funding. CDC officials expect to make awards to the WTC Health Registry, the Police Organization Providing Peer Assistance (the POPPA program), and the New York City Police Foundation's Project COPE over a 3-year period and to award funds to the FDNY WTC and worker and volunteer WTC programs in response to the treatment costs they incur. CDC officials have a proposed spending plan that allocates about $53.5 million for the latter two programs' treatment costs, but the officials told GAO that because they are uncertain about how quickly treatment costs could deplete the available funds, they may need to make adjustments. Officials from the FDNY WTC and worker and volunteer WTC programs told GAO that they anticipated that their estimated portion of the funds would be depleted well before the end of 3 years. As of August 2006, CDC awarded about $4.5 million of the $75 million: about $1.9 million to the WTC Health Registry, $1.5 million to the FDNY WTC program, and almost $1.1 million to the worker and volunteer WTC program. In addition, CDC expects to award $1.5 million to the POPPA program and $3 million to Project COPE in September 2006. CDC is waiting to make further awards until it has reached certain decisions about the coverage of treatment services, such as which prescription drugs would be covered. CDC expects to begin making further awards around February 2007.

IRS's Business Systems Modernization program, which began in 1999, is a multibillion-dollar, high-risk, highly complex effort that involves the development and delivery of a number of modernized tax administration and internal management systems, as well as core infrastructure projects, which are intended to replace the agency's aging business and tax processing systems and provide improved and expanded service to taxpayers and internal business efficiencies for IRS. CADE, one of the core systems of the Business Systems Modernization program, was intended to provide a modernized system of taxpayer accounts, with the ultimate goal of eventually replacing the Individual Master File (IMF), a 1960s legacy tax master file that maintains all taxpayer records for individual taxpayers. The IMF is the authoritative data source for individual tax account data. Tax data and related information pertaining to individual taxpayers are posted to the IMF, and the IMF is updated annually to incorporate new tax law procedures and changes. The IMF is a critical component of IRS's ability to process tax returns, as all the other IRS information system applications use data from this source. According to IRS, the IMF is a complex computer system that maintains all individual taxpayer records but has inherent limitations that significantly constrain IRS's ability to achieve its mission. The delays in weekly updates of taxpayer accounts, the lack of synchronization of taxpayer data across dozens of systems, the complexity of the data, the large volumes of data, and the ongoing need to embed new tax laws and business rules contribute to IRS systems storing, sharing, and processing data that is often incomplete, untimely, or inaccurate. With CADE, IRS started establishing a database and related functionality for posting, settlement, maintenance, refund processing, and issue detection for taxpayer account and return data for relatively simple tax returns for individual taxpayers. Since 2005, CADE has processed and recorded tax return and tax account information for increasing numbers of individual taxpayers. IRS reported that, in 2010, CADE processed about 41 million relatively simple returns (about 30 percent of the total individual income tax returns received); and issued about 36 million refunds that totaled in excess of $66 billion (approximately 14 percent of total refunds), and processed over 7 million taxpayer payments amounting to approximately $90 billion--with zero defects in balancing. In addition, IRS reported that it issues refunds with CADE approximately 5 days faster than refunds processed by the IMF. Although IRS made progress in processing individual taxpayer returns with CADE, IRS found that each successive release of the system was far more difficult as more complex accounts were to be supported, raising concerns about the effort required to address these increasing complexities. Also, since the CADE system operates concurrently with IMF processing, work must be done across the two environments, increasing the complexity of filing season operations and resulting in a greater risk for errors in processing taxpayer account information. IRS was concerned that, without a significant change in approach, CADE would not be completed until at least 2020. These challenges led the IRS Commissioner to form a team of senior IRS technologists and external advisers to review CADE and IRS's modernization strategy for individual taxpayer accounts. The review identified six risks with the CADE strategy. As a result of the review, in August 2008, IRS began defining a new strategy to address the challenges confronting CADE and deliver improved individual tax processing capabilities sooner. Specifically, the new strategy called for accelerating completion of a modernized database and converting to a single processing system sooner than the current approach would allow. The new strategy is referred to as CADE 2. Table 1 describes the CADE risks reported by IRS and how CADE 2 intends to address them. As noted in the table, IRS used prototypes to test and prove complex technical and performance concepts early and provide guidance and information needed for detailed design. These prototypes were completed in 2010, although some remaining tasks in one of them--the Database Performance Test Prototype--will be completed later. CADE 2 is expected to deliver its functionality incrementally through three phases known as transition states. Table 2 shows the target completion dates and key characteristics for transition state 1 (TS1), transition state 2 (TS2), and the target state. TS1 consists of the following two projects: Daily Processing: According to IRS, this project is to enable IRS to process and post all individual taxpayer returns filed and other transactions by updating and settling individual taxpayer accounts in 24-48 hours with current, complete, and authoritative data, and provide employees with timely access. More specifically, through the Daily Processing project, IRS is expected to modify the IMF to run daily, i.e., modify current transaction processing to occur daily versus weekly; make changes to the Integrated Data Retrieval System (IDRS) and the notice generation process to support the daily vs. weekly processing cycle; and prepare daily "loads" to update the CADE 2 database for IDRS and other downstream systems as they are able to support daily processing. Database Implementation: According to IRS, this project is to establish the CADE 2 database, a relational database that will house data on individual taxpayers and their accounts; develop a capability to transfer data from IMF to the database; and provide for the transfer of data from the database to downstream IRS financial, customer service and compliance systems. Specifically, the project is expected to enable IRS to perform a one-time initialization of the database when TS1 begins (this will involve loading all taxpayer account data from IMF and the CADE database into the CADE 2 database and then validating it); perform daily updates to the database after TS1 begins by extracting, transforming, and loading daily processing changes to IMF data; and utilize the database to provide individual taxpayer account information to selected downstream systems to assist IRS service and compliance personnel. For example, the CADE 2 database is intended to provide daily updates to IDRS, as well as weekly updates to the Integrated Production Model (IPM)--a downstream data repository designed to support IRS compliance functions that house IMF and Business Master File data, information returns, and other data. IPM is expected to include current individual taxpayer data from the CADE 2 database. Regarding the status of these two projects, IRS completed efforts to define the TS1 projects' logical design in December 2010 and began the detailed design phase, which includes activities such as documenting the physical design of the solution. IRS expects to complete this phase by April 2011. IRS has also defined overall objectives for TS2 and the target state, but detailed planning of TS2 is in the early stages, with the formation of a planning team that expects to define a high-level approach by early May 2011. In December 2009, the Treasury Inspector General for Tax Administration (TIGTA) identified several challenges that IRS needed to address to effectively manage identified CADE 2 risks, including, among other things, implementing a governance structure for the PMO to provide oversight and direction for the implementation of CADE 2 and developing contingency plans in the event that CADE 2 cannot be fully implemented. IRS officials completed a contingency strategy in November 2010. In May 2010, we reported that, while much had been done to define CADE 2's transition states, IRS had not identified time frames for completing key planning activities for TS2. Consequently, we recommended IRS establish these time frames. In response, IRS stated that it would develop a plan for launching TS2 activities that will outline the approach and a high-level plan for the transition state. IRS also noted that business requirements would be completed in parallel with the development of the plan. In December 2010, IRS initiated TS2 planning activities and set a target of May 2011 for agreeing on the scope and plan for the transition state. In November 2010, TIGTA reported on the prototypes undertaken by IRS to gain confidence in the CADE 2 solution. TIGTA found that the five prototype teams that were established generally managed their objectives effectively, and that the teams also identified risks that faced the successful execution of the prototype plans and took steps to overcome the barriers. TIGTA recommended that IRS take several actions to reemphasize compliance with the elements of the CADE 2 Prototype Process. In its response, IRS agreed with TIGTA's recommendations and described steps to address them. While the MITS organization has primary responsibility for developing, managing, and delivering the CADE 2 program, IRS has established a new governance approach for the program, including the CADE 2 PMO that is to manage the program and the relationship with the program's stakeholders, define the solution specifications to meet the requirements and the delivery of the program scope, and specify the roles and responsibilities of all parties. The new governance approach is intended to foster rapid decision-making and proactive risk management and issue resolution, as well as ensure that the appropriate stakeholders are involved, engaged, and collaborating as a unified team in making CADE 2 decisions. The CADE 2 PMO is headed by an Associate Chief Information Officer and made up of several groups, each responsible for a different aspect of the program. These groups include Delivery Management. Responsible for overseeing and coordinating activities across the projects that are implementing the solution for each of the transition states. Program Management and Control. Responsible for executing the program management processes, CADE 2 solution planning, and governance and control activities. Chief Architect. Responsible for setting the overall technical direction in alignment with IRS's business and technical architecture, as defined in the enterprise architecture. Chief Engineer. Responsible for reviewing detailed design and interfaces to ensure the CADE 2 solution will work, is secure, and integrates with other systems and infrastructure. Business Operations. Responsible for providing the administrative support for all branches of the PMO. These groups are to work with (1) delivery partners who are other MITS organizations (e.g., Applications Development and Enterprise Operations) that work to deliver the program scope, (2) business partners (e.g., W&I and the Chief Financial Officer) who are organizations who either use the system or define the business requirements and, as such, play a key role in overseeing CADE 2, and (3) other stakeholder groups who support, influence, or oversee the program. To oversee and guide the PMO, IRS also established several executive- level boards and advisory councils composed of business and IT officials. The executive-level boards include the following: The CADE 2 Executive Steering Committee, which consists of senior executives from MITS, W&I, and Department of the Treasury, and serves as an oversight group that ensures the program stays aligned with the IRS strategic plan and approves decisions with significant organizational or external impact; and The CADE 2 Governance Board, which consists of Associate Chief Information Officers from CADE 2 and Applications Development and the business modernization executive from W&I, and ensures that objectives are met; decisions and issues are resolved in a timely manner; risks are managed appropriately; and the expenditure of resources allocated is fiscally sound. The CADE 2 Governance Board also approves program risk response plans, milestone exits, and resolves escalated issues. The advisory councils include the Executive Oversight Team, which consists of executives from the CADE 2 PMO, delivery partners, and senior-level business executives, and serves as the oversight for the day-to-day execution of the CADE 2 program; Associate Chief Information Officer Advisory Council representing leaders of each of the MITS technical units; Program Leadership Advisory Council, a broad group of executives from W&I, Agency Wide Shared Services, and across MITS that consult on key issues, risks, analyses, and recommendations on an as needed basis; and Architecture/Engineering Review Council recently created to provide architectural and engineering leadership across the program to ensure design and development efforts are complete and adhere to solution architecture and engineering best practices. In addition, while the projects chartered under CADE 2 are expected to follow the IRS enterprise life cycle methodology that other projects are required to follow, IRS also defined a program management framework for CADE 2 that defines the phases, activities, deliverables, milestones, and reviews necessary to manage both the program and each of its component projects in a coordinated and integrated manner. The PMO and supporting boards are to play key roles in reviewing deliverables and approving milestone exits for the program and assuring that the projects are properly aligned and integrated with the program. Finally, IRS has also defined and started implementing several processes to support its management of the CADE 2 program. They include processes for managing risks, the integrated master schedule, the prototype process, and other activities. While several of these processes were already established for projects, IRS enhanced them for CADE 2 to take into account the complexities associated with integrating projects into a program. For TS1, IRS has identified 20 benefits. These benefits span three categories: service; compliance; and other benefits, including reduced system costs and improved security benefits. Our past work at IRS established that quantitative targets can be useful for tracking program performance. While it may not always be possible to quantify targets, doing so helps to objectively measure the extent to which expected benefits have been realized. As shown in table 3, IRS has set quantitative targets for 15 of the 20 benefits for TS1. (Table 7 in app. II describes all the benefits IRS has identified and the related quantitative targets where they exist.) An example of a benefit with a quantitative target is the percentage of refunds IRS will process on a daily basis. IRS expects CADE 2 to increase this from 30 to 80 percent, resulting in faster refunds to many taxpayers. Another example is the security benefit of reducing the number of IRS databases that contain extracts of data from CADE 2. IRS expects this to be reduced by 20 percent from the 2011 baseline. IRS officials have stated that they have not set quantitative targets for five TS1 benefits for two reasons. First, officials told us that two benefits related to improved security and updated account information cannot be quantified and therefore do not have numeric targets. (See app. II for more details.) Second, IRS officials stated that competing priorities have impeded their ability to define the remaining targets. While they stated they plan to define these targets, they have not committed to specific time frames for doing so. Until IRS has set quantitative targets where feasible in TS1, it and other stakeholders including Congress will not have complete information on the specific benefits that can be expected from funds spent on this phase. In addition, it will be more difficult to objectively measure whether expected benefits have been delivered. In contrast with TS1, IRS has not finalized the benefits expected in TS2 or defined related quantitative targets. Specifically, IRS has identified a list of 22 service, compliance, and other benefits including addressing financial material weaknesses it expects to achieve beyond TS1. These benefits are summarized in table 4 and described in greater detail in table 7 in appendix II. However, IRS has not yet determined whether these benefits are to be delivered in TS2 or the target state. According to IRS, committing to what can be delivered in TS2 is contingent upon a number of decisions yet to be made. Specifically, officials stated that IRS must first finalize its approach for TS2 (as noted earlier, the agency expects to do this by May 2011). Officials also stated that funding decisions for the upcoming fiscal year could impact IRS's plans for TS2. In addition, IRS has not finished defining the full range of possible benefits it expects beyond TS1. For example, one possible compliance benefit that IRS is exploring is requiring providers of information returns to send those returns to IRS and taxpayers at the same time, which would allow IRS to use this data earlier to conduct some compliance checks. Conducting earlier analyses of tax return information using CADE 2 and IPM could allow IRS to stop an erroneous refund before it goes out. IRS currently waits until well after the filing season to conduct some compliance checks, such as computerized matching of information returns and tax returns and examinations of taxpayers' books and records. Such compliance checks can lead to costly collection efforts from noncompliant taxpayers. Finally, as summarized in table 4 and shown in greater detail in appendix II, IRS has not yet set quantitative targets for any of the benefits defined or committed to any time frames for doing so. As noted for TS1, until IRS has set quantitative targets where feasible in TS2, it and other stakeholders will not have complete information on the specific benefits than can be expected from funds spent, and it will be difficult to objectively measure whether expected benefits have been delivered. We acknowledge that thinking through the expected TS2 benefits (including those from the table in app. II and other potential benefits) and related targets as the approach and design are being considered may result in having to make adjustments later. However, the benefits and targets generated at this stage can influence design decisions and allow IRS to identify early how associated systems and business processes might be affected. In July 2009, IRS reported preliminary life cycle cost estimates for TS1 and TS2 of about $1.3 billion through 2024, including about $377 million for development and $922 million for operations and maintenance. The estimates include costs for eight categories of work needed to achieve the goals defined for TS1 and TS2. The majority of the costs are for the Operational Framework category ($663 million or 51 percent of total costs), which is to provide for the infrastructure on which to develop, test, and deploy the new and enhanced applications under the CADE 2 program. The CADE 2 preliminary cost estimates are summarized in table 5. The estimated annual costs from 2009 through 2024 are shown in figure 1. At the time they were developed, IRS estimated CADE 2 development costs to end in 2015 and total costs to peak during 2011 at about $162 million. Estimated costs between 2015 and 2024 are all recurring operations and maintenance costs. IRS's estimates did not include expected costs for the following items: operations and maintenance of the IMF system to include enhancements needed to achieve the CADE 2 target state, prototype development and assessments, technical training (estimated at $1 million to $3 million), work required to reach the final target state, and process reengineering costs/business costs associated with implementing the current weekly batch processing of accounts to the daily processing required at the completion of TS1. The process IRS used to develop the CADE 2 preliminary cost estimates was generally consistent with the best practices outlined in the GAO cost estimating guide. Specifically, IRS followed a well-defined process for developing a comprehensive, documented, accurate, and mostly credible life cycle cost estimate for the first two phases of CADE 2. For example, the estimation process was performed in accordance with a well-defined plan by an independent Estimation Program Office. Parametric estimation models were used that contained catalogs based on historical data, along with cost estimating relationships, designed to produce estimates analogous to similar programs. In addition, IRS used simulation techniques to incorporate risks and determine confidence bounds on the estimates. Further, IRS plans to update its estimates, consistent with the best practice to update estimates to reflect changes in technical or program assumptions. Specifically, since the estimates were prepared, IRS has developed a better understanding of the work required to meet CADE 2 objectives for TS1 and the current work breakdown structure (i.e., definition of work to be performed) no longer matches the one used to develop the preliminary estimates. IRS officials told us that, consistent with IRS's Estimation Program Office Estimator's Guide, they plan to revise their estimates after detailed design information for the database implementation and daily processing projects is completed and expect them to be available by the completion of our audit. CADE 2 PMO officials stated they did not expect the revised estimates to differ significantly from the current estimate. It is important to note that, even when all TS1 cost elements have been updated to accurately reflect the current understanding of the work to be performed, the total cost of ownership through TS2 could still significantly differ from the new estimate, given that, as previously noted, the approach for TS2 has yet to be defined. We identified the following three practices IRS did not follow that could strengthen its methods for estimating CADE 2 costs to ensure they are more credible: First, according to best practices, items excluded from estimates should be documented and explained. While IRS documented four of the five items that were excluded from the estimates, it did not provide an explanation for excluding these costs. In addition, IRS did not document that it excluded the business costs associated with moving to daily processing. IRS officials stated that, at the time the estimates were developed, these business costs were not well understood by the estimators and now believe that these costs would be relatively small, representing mostly costs for staff already being paid out of existing budgets. Nevertheless, consistently documenting excluded costs and providing a rationale for excluding them would improve credibility. Second, IRS's estimates did not include inflation. According to best practices, adjusting costs for inflation correctly is necessary if the cost estimate is to be credible. Inflation reflects the fact that the cost of an item usually continues to rise over time. If a mistake is made in applying inflation, or if inflation is not included, cost overruns can result. Third, IRS did not conduct a sensitivity analysis to examine the effects of changing assumptions and ground rules on its estimates. While IRS developed risk-adjusted estimates, it did not perform the formal sensitivity analysis necessary to understand which variables most affect the cost estimate. IRS officials stated they intend to include a sensitivity analysis in the revised cost estimates expected to be available by the completion of our audit. Performing this analysis will not only improve the credibility of the estimate, but it will provide management a better understanding of the relationship of key factors to cost, which is important in evaluating different options as part of subsequent risk and issue mitigation strategies and contingency plans. Given the size and significance of the CADE 2 program, it is important that IRS have an effective risk management process. According to best practices, an effective risk management process identifies potential problems before they occur, so that risk-mitigating activities may be planned and invoked as needed across the life of the product and project in order to mitigate adverse impacts on achieving objectives. It includes assigning resources, identifying and analyzing risks, and developing risk mitigation plans and milestones for key mitigation deliverables. IRS's risk management process for CADE 2 is generally consistent with best practices. For example, regarding resources assigned to risk management, the CADE 2 PMO's Director for Program Management and Control is responsible for "executing" the risk management process. Biweekly meetings are held where the Director for Delivery Management and project officials discuss project status and risks and determine whether risks need to be escalated as candidate risks to the program level. Monthly risk and issue meetings are held to discuss the program-level risks. Finally, those risks that require additional oversight are then presented to the Chief Technology Officer for review. Program-level and project-level risks are scored and tracked in a consistent manner using a risk repository tool. Risk mitigation plans and associated milestones are defined for each risk. Officials from the PMO have also told us that the management structure and processes that have been established for the program are intended to help mitigate the risks associated with developing such a large and complex program. While IRS is generally effectively carrying out the activities associated with the risk management process, the two key documents that support this process are in some cases inconsistent and do not fully reflect actions being taken. For example, the Risk and Issue Management Process document calls for automatically escalating those projects with a high to very high risk exposure score to the next level of management while the Risk and Issue Management Plan calls for escalating risks based primarily upon the judgment of the risk owner and responsible manager. The Risk and Issue Management Process identifies a specific set of actions to mitigate risks depending on the risk exposure score while the Risk and Issue Management Plan provides high-level guidance describing various alternatives that can be taken to mitigate risks. As another example, both documents identify the risk management roles but do not specify when in the process these roles are assigned or what the required qualifications are. IRS recognizes its risk management procedures could be strengthened, and the Director for Program Management and Control intends to review these procedures by the completion of our audit, to ensure they are consistent and clearly reflect the process in place. This action will help IRS achieve optimal effectiveness in identifying, prioritizing, or managing risks that could affect the cost and schedule of the program. Using its risk management process, IRS has identified several significant program risks for CADE 2. As of November 2010, six of these were considered "top risks." These "top risks," which include TS1 contingency planning and resource contention among IRS priorities are listed in table 6 along with the mitigation strategies that have been defined for them. (For a complete list of program risks, see app. III.) While IRS has taken many steps to reduce the risks associated with CADE 2, the agency will nevertheless be challenged in meeting its January 2012 schedule for delivering the benefits associated with daily processing and database implementation given the amount of work needed to complete TS1 over the next year. This includes completing logical design and detailed design activities, testing and integration of core daily applications and their development, and testing and population of the database with current CADE and IMF data. Further, as already noted, waiting to finish (1) defining targets for the TS1 benefits and (2) finalizing benefits and related targets for TS2 creates a risk of costly or time-consuming late design changes. Recognizing the challenges it faces, IRS has taken additional steps to increase the likelihood of meeting the schedule. These include moving certain activities up, performing others concurrently and adding checkpoints to monitor the program's status. In addition, IRS has recently completed a TS1 contingency strategy. While these actions may increase the likelihood of meeting the schedule, some of them, such as performing activities concurrently, could potentially introduce more risk to CADE 2's successful development and implementation. Defining benefits and related quantitative targets where feasible is important to understanding what to expect and how to measure performance against expectations. For TS1, while IRS has identified numerous expected benefits, it has not yet defined quantitative targets for all of them. Given that IRS is finalizing the design and preparing to implement TS1, it is important for the agency to complete defining the targets associated with TS1 benefits. Delaying the setting of targets could result in costly and time-consuming changes to the design and associated requirements. Similarly, addressing TS2 benefits and related targets as the design is being considered could influence design decisions and help identify early on how systems and processes might be affected. In developing cost estimates for the first two phases of CADE 2, IRS did not disclose all excluded costs, provide a rationale for documented excluded costs, adjust for inflation, or perform a sensitivity analysis to examine the effects of changing assumptions and ground rules. IRS stated it would perform a sensitivity analysis in the revised estimates it expects to release by the completion of our audit. To its credit, IRS has established a risk management process that is generally consistent with best practices and has identified mitigation strategies to address each identified risk. Several of the risks identified are significant and will require continued attention from IRS. We recommend that the Commissioner of Internal Revenue direct the appropriate officials to take the following five actions: to provide a better basis for measuring CADE 2 performance in achieving TS1 benefits, set the remaining quantitative targets where feasible as soon as possible in 2011; in conjunction with developing the approach for TS2 expected in May 2011, finalize the phase's expected benefits, set quantitative targets where feasible, and identify how related systems and business processes might be affected; and to ensure the revised estimates for CADE 2 are credible, include inflation when calculating costs, include the costs IRS explicitly excluded or provide a rationale for excluding them, and include any business costs associated with moving to daily processing or document that these costs were excluded and provide a rationale for excluding them. IRS's Commissioner provided written comments on a draft of this report (reprinted in app. IV.) In its comments, IRS stated that it appreciated that the report recognized the progress the agency had made and that it is following best practices on important disciplines like risk management and cost estimation. IRS also agreed with our recommendations and stated it would provide a detailed corrective action plan addressing each one along with its response to our final report. IRS also provided revised cost estimates for CADE 2 that address our finding related to the use of a sensitivity analysis. We are sending copies of this report to the appropriate congressional committees, and to the Chairmen and Ranking Members of other Senate and House committees and subcommittees that have appropriation, authorization, and oversight responsibilities for IRS. We will also send copies to the Commissioner of Internal Revenue, the Secretary of the Treasury, the Chairman of the IRS Oversight Board, and the Director of the Office of Management and Budget. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions or wish to discuss the material in this report further, please contact us at (202) 512-9286 or [email protected] or at (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. As agreed, our objectives were to 1. determine whether the Internal Revenue Service (IRS) has identified the expected benefits of Customer Account Data Engine (CADE) 2 and set targets for measuring success, 2. examine the estimated costs of CADE 2 and assess IRS's process for 3. assess IRS's process for managing the risks associated with CADE 2 and describe the risks IRS has identified using this process. For our first objective, we reviewed relevant documents, including the CADE 2 Program Business Case and Benefits Management Plan, and interviewed officials from IRS offices: Wage and Investment and Modernization and Information Technology Services (MITS). We also used criteria from our prior work to identify attributes of successful performance measures. We reviewed documents including the Program Roadmap, Business Case and Benefits Management Plan, and Benefits Roadmap, and the Office of Management and Budget Exhibit 300. For our second objective, we summarized the estimated costs reported in the July 2009 CADE 2 Estimate Summary/ Basis of Estimate and totaled costs by year for each of the major categories for which estimates were developed. We reviewed several documents, including the July 2009 CADE 2 Estimate Summary/ Basis of Estimate and the Estimation Breakdown Summary reports and capabilities and solution concept documents (e.g., the Integrated Master File Enhancements: Capabilities Definition and Solution Concept document and the Financial Settlement: Capabilities Definition and Solution Concept document), which support the Basis of Estimate. We also reviewed IRS's Estimators' Reference Guide and aspects of the SEER-SEM methodology that was used to develop the estimates. We also interviewed staff from the Estimation Program Office, as well as members of the Program Management and Control function of the CADE 2 Program Management Office (PMO) responsible for tracking the program's cost. We compared what we learned with the 12 steps for developing well-documented, comprehensive, accurate, and credible cost estimates identified in the GAO Cost Estimating and Assessment Guide. For our third objective, we reviewed documented procedures supporting the risk management process, including the Risk and Issue Management Process, the Risk and Issue Management Plan, the user guide for the Item Tracking Reporting and Control system that is used to track risks and the MITS Risk Identification Procedure. We also reviewed artifacts of the risk management process, including program risk logs and detailed risk reports. We participated in meetings in which risks were discussed and reviewed agendas and meeting minutes for others. We also interviewed several officials, including the CADE 2 Program Director, the Director of the CADE 2 PMO Program Management and Control office, and the Director of the CADE 2 PMO Delivery Management office. Through document reviews and interviews with appropriate officials, we also examined the following areas in greater depth: (1) schedule, (2) contractor oversight, (3) requirements management, (4) prototypes, and (5) human capital. We selected these areas because, based on our experience, they represent areas of risk or have been problematic for IRS in the past. In addition, we examined IRS's prototyping efforts to understand how the agency was using them to mitigate risks. We evaluated what we learned about IRS's risk management process against relevant criteria for Software Engineering Institute's Capability Maturity Model Integration (CMMI) to determine the effectiveness of the process. To obtain background information on the program, we reviewed a host of documents developed by the CADE 2 PMO, including the CADE 2 Program Charter, Solution Architecture, Program Roadmap, Program Management Plan, the charters of the two CADE 2 transition state 1 projects (Daily Processing and Database Implementation), as well as governance team meeting minutes. We also observed CADE 2 meetings, conducted interviews with and received briefings from CADE 2 officials, including the IRS Chief Technology Officer, the Deputy Chief Information Officer for Strategy and Modernization, the Associate Chief Information Officer who serves as executive-in-charge of the CADE 2 program, and the Chief Architect of the CADE 2 program. We conducted this performance audit from January 2010 to March 2011 primarily at the New Carrollton Federal Building in New Carrollton, Maryland, where the CADE 2 staff are located, and Atlanta, Georgia, where the Wage and Investment division staff are located, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 7 shows a list of benefits the IRS has defined to date for transition state 1 (TS1) and beyond, a related quantitative target for a benefit if applicable, and the transition state in which IRS expects to realize the benefit. According to IRS, defining which benefits will be delivered in transition state 2 (TS2) is contingent upon a number of decisions yet to be made and actual benefits may differ from those currently expected depending on the outcome of these decisions. The following (see table 8) are the IRS's reported CADE 2 program risks and their planned mitigation strategies as of November 2010. In addition to the individuals named above, Sabine R. Paul, Assistant Director; Joanna Stamatiades, Assistant Director; Rebecca Eyler; Mary D. Fike; Nancy Glover; Sairah R. Ijaz; Robert Kershaw; Paul B. Middleton; John Ockay; and Jennifer Wong made key contributions to this report.

In August 2008, the Internal Revenue Service (IRS) began defining a new strategy for modernizing the way it manages individual taxpayer accounts. The strategy, known as Customer Account Data Engine (CADE) 2, is expected to provide service, compliance, and other benefits to IRS and to taxpayers beginning in 2012. IRS expects to implement CADE 2 in three phases. The first phase is expected to be delivered in 2012, the second in 2014, and the third at a later yet to be determined date. GAO was asked to (1) determine whether IRS has identified the expected benefits of CADE 2 and set targets for measuring success, (2) examine the estimated costs and assess IRS's process for developing them, and (3) assess IRS's process for managing the risks associated with CADE 2 and describe the risks IRS has identified using this process. To do so, GAO reviewed relevant documentation, attended program review meetings, and interviewed IRS officials. IRS has identified 20 service, compliance, and other benefits for the first phase of CADE 2, including increasing the percentage of refunds processed daily and reducing the number of erroneous notices due to better account information, and has set quantitative targets for most of these benefits. GAO has previously reported that quantitative targets can be useful for tracking program performance. While it may not always be possible to quantify targets, doing so helps to objectively measure the extent to which expected benefits have been realized. However, IRS has not yet finalized expected benefits for the second phase or set related quantitative targets, because, according to officials, these are contingent upon yet to be made design and funding decisions. Nevertheless, addressing the second phase's benefits and related targets as the design is being considered could influence design decisions and help identify early on how systems and processes might be affected. IRS reported preliminary life cycle cost estimates for the first two phases of the CADE 2 program of about $1.3 billion through 2024. This includes about $377 million for development and $922 million for operations and maintenance. IRS's process for developing the preliminary estimates was generally consistent with best practices. However, the agency did not follow three practices intended to improve the credibility of cost estimates. Specifically, IRS did not (1) consistently document excluded costs or provide a rationale for excluding them; (2) use inflation in calculating costs; and (3) perform an analysis to examine the effects of changing ground rules and assumptions. While IRS stated it would perform the analysis of changing ground rules and assumptions in revised estimates to be available by the completion of our audit, until the agency implements all these practices its estimates may not be credible. IRS's process for managing the risks associated with CADE 2 is generally consistent with best practices. Through its process, IRS identified significant risks facing CADE 2, including that filing season and other top information technology investment priorities may result in contention for key resources, the delivery of the first phase of CADE 2 may be delayed if deficiencies identified in requirements are not corrected in a timely manner, and the risk that technical challenges and other risks to implementing the database identified as a result of prototyping efforts may not be addressed. To its credit, IRS has developed mitigation strategies for each identified risk. While IRS is working to ensure CADE 2 is successfully managed, the schedule for delivering the initial phase is nevertheless ambitious. IRS officials have acknowledged this and are taking actions to increase their chances of meeting it, including moving certain activities up, performing others concurrently, and adding checkpoints to monitor the program's status. While these actions may increase the likelihood of meeting the schedule, some of them, such as performing activities concurrently, could potentially introduce more risk to CADE 2's successful development and implementation. GAO's recommendations include (1) identifying all of the second phase benefits, setting the related targets, and identifying how systems and business processes might be affected; and (2) improving the credibility of revised cost estimates by including all costs or providing a rationale for excluded costs, and adjusting costs for inflation. In its comments on a draft of this report, IRS agreed with GAO's recommendations.

Since 2000, legacy airlines have faced unprecedented internal and external challenges. Internally, the impact of the Internet on how tickets are sold and consumers search for fares and the growth of low cost airlines as a market force accessible to almost every consumer has hurt legacy airline revenues by placing downward pressure on airfares. More recently, airlines' costs have been hurt by rising fuel prices (see figure 1). This is especially true of airlines that did not have fuel hedging in place. Externally, a series of largely unforeseen events--among them the September 11th terrorist attacks in 2001 and associated security concerns; war in Iraq; the SARS crisis; economic recession beginning in 2001; and a steep decline in business travel--seriously disrupted the demand for air travel during 2001 and 2002. Low fares have constrained revenues for both legacy and low cost airlines. Yields, the amount of revenue airlines collect for every mile a passenger travels, fell for both low cost and legacy airlines from 2000 through 2004 (see figure 2). However, the decline has been greater for legacy airlines than for low cost airlines. Legacy airlines, as a group, have been unsuccessful in reducing their costs to become more competitive with low cost airlines. Unit cost competitiveness is key to profitability for airlines because of declining yields. While legacy airlines have been able to reduce their overall costs since 2001, these were largely achieved through capacity reductions and without an improvement in their unit costs. Meanwhile, low cost airlines have been able to maintain low unit costs, primarily by continuing to grow. As a result, low cost airlines have been able to sustain a unit cost advantage as compared to their legacy rivals (see figure 3). In 2004, low cost airlines maintained a 2.7 cent per available seat mile advantage over legacy airlines. This advantage is attributable to lower overall costs and greater labor and asset productivity. Weak revenues and the inability to realize greater unit cost-savings have combined to produce unprecedented losses for legacy airlines. At the same time, low cost airlines have been able to continue producing modest profits as a result of lower unit costs (see figure 4). Legacy airlines have lost a cumulative $28 billion since 2001 and are predicted to lose another $5 billion in 2005, according to industry analysts. Since 2000, as the financial condition of legacy airlines deteriorated, they built cash balances not through operations but by borrowing. Legacy airlines have lost cash from operations and compensated for operating losses by taking on additional debt, relying on creditors for more of their capital needs than in the past. In the process of doing so, several legacy airlines have used all, or nearly all, of their assets as collateral, potentially limiting their future access to capital markets. In sum, airlines are capital and labor intensive firms subject to highly cyclical demand and intense competition. Aircraft are very expensive and require large amounts of debt financing to acquire, resulting in high fixed costs for the industry. Labor is largely unionized and highly specialized, making it expensive and hard to reduce during downturns. Competition in the industry is frequently intense owing to periods of excess capacity, relatively open entry, and the willingness of lenders to provide financing. Finally, demand for air travel is highly cyclical, closely tied to the business cycle. Over the past decade, these structural problems have been exacerbated by the growth in low cost airlines and increasing consumer sensitivity to differences in airfares based on their use of the Internet to purchase tickets. More recently airlines have had to deal with persistently high fuel prices--operating profitability, excluding fuel costs, is as high as it has ever been for the industry. Airlines seek bankruptcy protection for such reasons as severe liquidity pressures, an inability to obtain relief from employees and creditors, and an inability to obtain new financing, according to airline officials and bankruptcy experts. As a result of the structural problems and external shocks previously discussed, there have been 160 total airline bankruptcy filings since deregulation in 1978, including 20 since 2000, according to the Air Transport Association. Some airlines have failed more than once but most filings were by smaller carriers. However, the size of airlines that have been declaring bankruptcy has been increasing. Of the 20 bankruptcy filings since 2000, half of these have been for airlines with more than $100 million in assets, about the same number of filings as in the previous 22 years. Compared to the average failure rate for all types of businesses, airlines have failed more often than other businesses. As figure 5 shows, in some years, airline failures were several times more common than for businesses overall. With very few exceptions, airlines that enter bankruptcy do not emerge from it. Of the 146 airline Chapter 11 reorganization filings since 1979, in only 16 cases are the airlines still in business. Many of the advantages of bankruptcy stem from legal protection afforded the debtor airline from its creditors, but this protection comes at a high cost in loss of control over airline operations and damaged relations with employees, investors, and suppliers, according to airline officials and bankruptcy experts. Contrary to some assertions that bankruptcy protection has led to overcapacity and under pricing that have harmed healthy airlines, we found no evidence that this has occurred either in individual markets or to the industry overall. Such claims have been made for more than a decade. In 1993, for example, a national commission to study airline industry problems cited bankruptcy protection as a cause for the industry's overcapacity and weakened revenues. More recently, airline executives have cited bankruptcy protection as a reason for industry over capacity and low fares. However, we found no evidence that this had occurred and some evidence to the contrary. First, as illustrated by Figure 6, airline liquidations do not appear to affect the continued growth in total industry capacity. If bankruptcy protection leads to overcapacity as some contend, then liquidation should take capacity out of the market. However, the historical growth of airline industry capacity (as measured by available seat miles, or ASMs) has continued unaffected by major liquidations. Only recessions, which curtail demand for air travel, and the September 11th attack, appear to have caused the airline industry to trim capacity. This trend indicates that other airlines quickly replenish capacity to meet demand. In part, this can be attributed to the fungibility of aircraft and the availability of capital to finance airlines. Similarly, our research does not indicate that the departure or liquidation of a carrier from an individual market necessarily leads to a permanent decline in traffic for that market. We contracted with Intervistas/GA2, an aviation consultant, to examine the cases of six hub cities that experienced the departure or significant withdrawal of service of an airline over the last decade (see table 1). In four of the cases, both local origin-and-destination (i.e., passenger traffic to or from, but not connecting through, the local hub) and total passenger traffic (i.e., local and connecting) increased or changed little because the other airlines expanded their traffic in response. In all but one case, fares either decreased or rose less than 6 percent. We also reviewed numerous other bankruptcy and airline industry studies and spoke to industry analysts to determine what evidence existed with regard to the impact of bankruptcy on the industry. We found two major academic studies that provided empirical data on this issue. Both studies found that airlines under bankruptcy protection did not lower their fares or hurt competitor airlines, as some have contended. A 1995 study found that an airline typically reduced its fares somewhat before entering bankruptcy. However, the study found that other airlines did not lower their fares in response and, more importantly, did not lose passenger traffic to their bankrupt rival and therefore were not harmed by the bankrupt airline. Another study came to a similar conclusion in 2000, this time examining the operating performance of 51 bankrupt firms, including 5 airlines, and their competitors. Rather than examine fares as did the 1995 study, this study examined the operating performance of bankrupt firms and their rivals. This study found that bankrupt firms' performance deteriorated prior to filing for bankruptcy and that their rivals' profits also declined during this period. However, once a firm entered bankruptcy, its rivals' profits recovered. Under current law, legacy airlines' pension funding requirements are estimated to be a minimum of $10.4 billion from 2005 through 2008. These estimates assume the expiration of the Pension Funding Equity Act (PFEA) at the end of this year. The PFEA permitted airlines to delay the majority of their deficit reduction contributions in 2004 and 2005; if this legislation is allowed to expire it would mean that payments due from legacy airlines will significantly increase in 2006. According to PBGC data, legacy airlines are estimated to owe a minimum of $1.5 billion this year, rising to nearly $2.9 billion in 2006, $3.5 billion in 2007, and $2.6 billion in 2008. In contrast, low cost airlines have eschewed defined benefit pension plans and instead use defined contribution (401k-type) plans. However, pension funding obligations are only part of the sizeable amount of debt that carriers face over the near term. The size of legacy airlines' future fixed obligations, including pensions, relative to their financial position suggests they will have trouble meeting their various financial obligations. Fixed airline obligations (including pensions, long term debt, and capital and operating leases) in each year from 2005 through 2008 exceed total cash balances of these same legacy airlines by a substantial amount. Legacy airlines carried cash balances of just under $10 billion going into 2005 (see figure 7). These airlines fixed obligations are estimated to be over $15 billion in both 2005 and 2006, over $17 billion in 2007, and about $13 billion in 2008. Fixed obligations in 2008 and beyond will likely increase as payments due in 2006 and 2007 may be pushed out and new obligations are assumed. If these airlines continue to lose money this year as analysts predict, this picture becomes even more tenuous. The enormity of legacy airlines' future pension funding requirements is attributable to the size of the pension shortfall that has developed since 2000. As recently as 1999, airline pensions were overfunded by $700 million based on Security and Exchange Commission (SEC) filings; by the end of 2004 legacy airlines reported a deficit of $21 billion (see figure 8), despite the termination of the US Airways pilots plan in 2003. Since these filings, the total underfunding has declined to approximately $13.7 billion, due in part to the termination of the United Airline plans and the remaining US Airways plans. The extent of underfunding varies significantly by airline. At the end of 2004, prior to terminating its pension plans, United reported underfunding of $6.4 billion, which represented over 40 percent of United's total operating revenues in 2004. In contrast, Alaska reported pension underfunding of $303 million at the end of 2004, or 13.5 percent of its operating revenues. Since United terminated its pensions, Delta and Northwest now appear to have the most significant pension funding deficits--over $5 billion and nearly $4 billion respectively--which represent about 35 percent of 2004 operating revenues at each airline. The growth of pension underfunding is attributable to 3 factors. Assets losses and low interest rates. Airline pension asset values dropped nearly 20 percent from 2001 through 2004 along with the decline in the stock market, while future obligations have steadily increased due to declines in the interest rates used to calculate the liabilities of plans. Management and labor union decisions. Airline management has funded their pension plans far less than they could have. For example, PBGC examined 101 cases of airline pension contributions from 1997 through 2002; these cases covered 18 pension plans sponsored by 5 airlines.During this time, $28.2 billion dollars could have been contributed to these pension plans on a tax-deductible basis; actual contributions amounted to $2.4 billion, or about 8.5 percent of what they could have contributed, despite earning profits in 1997-2000 (see figure 9) The maximum deductible contribution was made in only 1 of the 101 pension contribution cases examined by PBGC. In addition, management and labor have sometimes agreed to salary and benefit increases beyond what could reasonably be afforded. For example, in the spring of 2002, United's management and mechanics reached a new labor agreement that increased the mechanics' pension benefit by 45 percent, but the airline declared bankruptcy the following December. Pension funding rules are flawed. Existing laws and regulations governing pension funding and premiums have also contributed to the underfunding of defined benefit pension plans. As a result, financially weak plan sponsors, acting within the law, have not only been able to avoid contributions to their plans, but also increase plan liabilities that are at least partially insured by PBGC. Under current law, reported measures of plan funding have likely overstated the funding levels of pension plans, thereby reducing minimum contribution thresholds for plan sponsors. And when plan sponsors were required to make contributions, they often substituted "account credits" for cash contributions, even as the market value of plan assets may have been in decline. Furthermore, the funding rule mechanisms that were designed to improve the condition of poorly funded plans were ineffective. Other legal plan provisions and amendments, such as lump sum distributions and unfunded benefit increases may also have contributed to deterioration in the funding of certain plans. If large numbers of participants in an underfunded plan elect to receive their pension benefits in a lump sum, it can create the effect of a "run on the bank" and exacerbate the possibility of a plan's insolvency as plan assets are liquidated more quickly than expected. Plan funding can also be worsened by unfunded benefit increases. When a pension plan is underfunded and the plan sponsor is also in poor financial condition, there is an incentive, known as moral hazard, for the plan sponsor and employees to agree to pension benefit increases because at least part of the benefit increases may be insured by PBGC. Finally, the premium structure in PBGC's single-employer pension insurance program does not encourage better plan funding. While PBGC premiums may be partially based on plan funding levels, they do not consider other relevant risk factors, such as the economic strength of the sponsor, plan asset investment strategies, the plan's benefit structure, or the plan's demographic profile. In addition, current pension funding and pension accounting rules may also encourage plans to invest in riskier assets to benefit from higher expected long-term rates of return. The cost to PBGC and participants of defined benefit pension terminations has grown in recent years as the level of pension underfunding has deepened. When Eastern Airlines defaulted on its pension obligations of nearly $1.7 billion in 1991, for example, claims against the insurance program totaled $530 million in underfunded pensions and participants lost $112 million. By comparison, the US Airways and United pension terminations cost PBGC $9.6 billion in combined claims against the insurance program and reduced participants' benefits by $5.2 billion (see table 2). In recent pension terminations, active and high salaried employees generally lost more of their promised benefits compared to retirees and low salaried employees because of statutory limits. For example, PBGC generally does not guarantee benefits above a certain amount, currently $45,614 annually per participant at age 65. For participants who retire before 65 the benefits are even less; participants that retire at age 60 are currently limited to $29,649. Commercial pilots often end up with substantial benefit cuts when their plans are terminated because they generally have high benefit plans and are also required by FAA to retire at age 60. Far fewer nonpilot retirees are affected by the maximum payout limits. For example, at US Airways fewer than 5 percent of retired mechanics and attendants faced benefit cuts as a result of the pension termination. Tables 3 and 4 summarize the expected cuts in benefits for different groups of United's active and retired employees. It is important to emphasize that relieving legacy airlines of their defined benefit funding costs will help alleviate immediate liquidity pressures, but does not fix their underlying cost structure problems, which are much greater. Pension costs, while substantial, are only a small portion of legacy airlines' overall costs. As noted previously in figure 3, the cost of legacy airlines' defined benefit plans accounted for a 0.4 cent, or 15 percent difference between legacy and low cost airline unit costs. The remaining 85 percent of the unit cost differential between legacy and low cost carriers is attributable to factors other than defined benefits pension plans. Moreover, even if legacy airlines terminated their defined benefit plans it would not fully eliminate this portion of the unit cost differential because, according to labor officials we interviewed, other plans would replace them. Widely reported recent large plan terminations by bankrupt sponsors such as United Airlines and US Airways and the resulting adverse consequences for plan participants and the PBGC have pushed pension reform into the spotlight of national concern. The effect of various proposals to reform pension requirements on airlines, PBGC, and plan participants will vary. The funding relief afforded by PFEA will expire at the end of this year and many agree that the current rules are flawed and must be fixed. Various proposals have been made to correct these rules and shore up the PBGC guaranteed plans, and these proposals are still being debated. The administration has proposed tightening the funding rules among other changes. Some of the legacy airlines with large shortfalls have endorsed another bill in the Senate for a 25-year payback period if current plans are frozen. However, one legacy airline that has better funded its plan, while supporting a longer payback period, opposes freezing their plan. While the airline industry was deregulated 27 years ago, the full effect on the airline industry's structure is only now becoming evident. Dramatic changes in the level and nature of demand for air travel combined with an equally dramatic evolution in how airlines meet that demand have forced a drastic restructuring in the competitive structure of the industry. Excess capacity in the airline industry since 2000 has greatly diminished airlines' pricing power. Profitability, therefore, depends on which airlines can most effectively compete on cost. This development has allowed inroads for low cost airlines and forced wrenching change upon legacy airlines that had long competed based on a high-cost business model. The historically high number of airline bankruptcies and liquidations is a reflection of the industry's inherent instability. However, this should not be confused with causing the industry's instability. There is no clear evidence that bankruptcy has contributed to the industry's economic ills, including overcapacity and underpricing, and there is some evidence to the contrary. Equally telling is how few airlines that have filed for bankruptcy protection are still doing business. Clearly, bankruptcy has not afforded these companies a special advantage. Bankruptcy has become a means by which some legacy airlines are seeking to shed their costs and become more competitive. However, the termination of pension obligations by United Airlines and US Airways has had substantial and wide-spread effects on the PBGC and thousands of airline employees, retirees, and other beneficiaries. Liquidity problems, including $10.4 billion in near term pension contributions, may force additional legacy airlines to follow suit. Some airlines are seeking legislation to allow more time to fund their pensions. If their plans are frozen so that future liabilities do not continue to grow, allowing an extended payback period may reduce the likelihood that these airlines will file for bankruptcy and terminate their pensions in the coming year. However, unless these airlines can reform their overall cost structures and become more competitive with low cost competition; this will be only a temporary reprieve. As we have previously reported, the Congress should consider broad pension reform that is comprehensive in scope and balanced in effect.Revising plan funding rules is an essential component of comprehensive pension reform. For example, we testified that Congress should consider the incentives that pension rules and reform may have on other financial decisions within affected industries. Under current conditions, the presence of PBGC insurance may create certain "moral hazard" incentives--struggling plan sponsors may place other financial priorities above "funding up" its pension plan because they know PBGC will pay guaranteed benefits. Further, because PBGC generally takes over underfunded plans of bankrupt companies, PBGC insurance may create an additional incentive for troubled firms to seek bankruptcy protection, which in turn may affect the competitive balance within the industry. In light of the intrinsic problems facing the defined benefit system, meaningful and comprehensive pension reform is required to ensure that workers and retirees receive the benefits promised to them. Ideally, effective reform would incorporate many elements, among them: improving the accuracy of plan funding measures while minimizing complexity and maintaining contribution flexibility; revising the current funding rules to create incentives for plan sponsors to adequately finance promised benefits; developing a more risk-based PBGC insurance premium structure and providing incentives for sponsors to fund plans adequately; addressing the issue of underfunded plans paying lump sums and granting modifying PBGC guarantees of certain plan benefits; resolving outstanding controversies concerning hybrid plans by safeguarding the benefits of workers regardless of age; and improving plan information transparency for pension plan stakeholders without overburdening plan sponsors. The various proposals for comprehensive reform advanced by the Administration and various members of Congress could be a critical first step in addressing part of the long-term stability of the private defined benefits system. While we understand the legacy airline's liquidity pressures and their request for assistance, the uncertain efficacy of industry-specific relief needs to be weighed against the potential effects on both the industry and the government. At this point, because of a lack of a thorough understanding of those effects, particularly as they might change under various specific legislative proposals, we would suggest proceeding carefully, relying on sound fiduciary principles as a guide. This concludes my statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have at this time. For further information on this testimony, please contact JayEtta Hecker at (202) 512-2834 or by e-mail at [email protected]; or Barbara Bovbjerg at (202) 512-7215 or by e-mail at [email protected]. Individuals making key contributions to this testimony include Joe Applebaum, Paul Aussendorf, Anne Dilger, David Eisenstadt, Charles Ford, Charles Jeszeck, Steve Martin, George Scott, Richard Swayze, and Pamela Vines. 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 2001, the U.S. airline industry has confronted unprecedented financial losses. Two of the nation's largest airlines--United Airlines and US Airways--went into bankruptcy, terminating their pension plans and passing the unfunded liability to the Pension Benefit Guaranty Corporation (PBGC). PBGC's unfunded liability was $9.6 billion; plan participants lost $5.2 billion in benefits. Considerable debate has ensued over airlines' use of bankruptcy protection as a means to continue operations, often for years. Many in the industry and elsewhere have maintained that airlines' use of this approach is harmful to the industry, in that it allows inefficient carriers to reduce ticket prices below those of their competitors. This debate has received even sharper focus with pension defaults. Critics argue that by not having to meet their pension obligations, airlines in bankruptcy have an advantage that may encourage other companies to take the same approach. GAO's testimony presents preliminary observations in three areas: (1) the continued financial difficulties faced by legacy airlines, (2) the effect of bankruptcy on the industry and competitors, and (3) the effect of airline pension underfunding on employees, retirees, airlines, and the PBGC. U.S. legacy airlines have not been able to reduce their costs sufficiently to profitably compete with low cost airlines that continue to capture market share. Internal and external challenges to the industry have fundamentally changed the nature of the industry and forced legacy airlines to restructure themselves financially. The changing demand for air travel and the growth of low cost airlines has kept fares low, forcing these airlines to reduce their costs. They have struggled to do so, however, especially as the cost of jet fuel has jumped. So far, they have been unable to reduce costs to the level of their low-cost rivals. As a result, legacy airlines have continued to lose money--$28 billion since 2001. Although some industry observers have asserted that airlines undergoing bankruptcy reorganization contribute to the industry's financial problems, GAO found no clear evidence that historically airlines in bankruptcy have financially harmed competing airlines. Bankruptcy is endemic to the industry; 160 airlines filed for bankruptcy since deregulation in 1978, including 20 since 2000. Most airlines that entered bankruptcy have not survived. While bankruptcy may not be detrimental to the health of the airline industry, it is detrimental for pension plan participants and the PBGC. The remaining legacy airlines with defined benefit pension plans face over $60 billion in fixed obligations over the next 4 years, including $10.4 billion in pension contributions--more than some of these airlines may be able to afford given continued losses. Various pension reform proposals may provide some immediate liquidity relief to those airlines, but at the cost shifting additional risk to PBGC. Moreover, legacy airlines still face considerable restructuring before they become competitive with low cost airlines.

In 1986, the Congress replaced CSRS with FERS for federal employees hired beginning January 1, 1984, in part to (1) recognize the inclusion of federal employees under Social Security and (2) reduce federal pension costs. Among the concerns of congressional deliberators in crafting FERS were that its retirement benefits be comparable with those under CSRS and enable employees to maintain their standard of living in retirement. To accomplish these and other goals, FERS provides a retirement benefit that comprises three components: a basic FERS annuity, Social Security payments, and TSP payments. The total income from these sources is meant to help individuals to receive retirement benefits comparable with CSRS benefits and commensurate with their retirement income goals. The basic FERS annuity is similar to CSRS in that it guarantees a specific monthly retirement benefit based on age, length of creditable service, and the average of the highest 3 consecutive years' salaries. However, the FERS annuity is lower because its benefit formula credits each year of service generally at 1 percent while CSRS service credits range from 1.5 to 2 percent per year of service. In addition, cost-of-living adjustments authorized by FERS are lower and generally are not provided before age 62. Unlike the FERS basic annuity, the benefit provided under Social Security's benefit formula declines as a proportion of individuals' preretirement earnings as their earnings increase. For example, a person aged 62, with a certain lifetime earnings pattern and earnings of $20,000 in his or her final year of employment, would receive Social Security benefits that represent about 35 percent of those earnings. In contrast, a person aged 62, with a certain lifetime earnings pattern and earnings of $75,000 in his or her final year of employment, would receive a benefit that represents just about 17 percent of those earnings. Pension professionals believe that to maintain roughly the same living standard in retirement, individuals' income needs generally range from 60 to 80 percent of their preretirement annual pretax earnings. Among other things, retirees typically pay less taxes, do not have work-related expenses such as daily commuting costs and clothing needs, may no longer have dependent children, and may have their mortgages paid. TSP is administered by the Federal Retirement Thrift Investment Board, which is an independent agency. The Board consists of five part-time members who are appointed by the President. TSP's daily activities are carried out by a staff headed by an executive director selected by the Board. Retirement benefits from TSP are the flexible component of FERS because they depend on the amount that is in each employee's account at retirement. Thus, TSP can help FERS-covered employees to save toward a total retirement benefit that is commensurate with their retirement income goals. Employees under FERS are automatically enrolled in TSP because federal agencies are required to contribute an amount equal to 1 percent of their employees' salaries to the plan. In addition, employees can make voluntary contributions up to 10 percent of their salaries: agencies match the first 3 percent on a dollar-for-dollar basis and the next 2 percent at 50 cents to a dollar, for a 5 percent total agency contribution; additional employee contributions are not matched, but all contributions and earnings thereon are tax deferred. CSRS employees may also participate in TSP by contributing up to 5 percent of their salaries; while there is no agency match, the contributions and earnings are tax deferred. However, all employee contributions are limited to a statutory inflation-adjusted cap, which was $8,994 in 1993. TSP contributions can be invested in a federal government securities fund (G fund), a commercial bond fund (F fund), and a commercial large capitalization stock fund (C fund). The C and F funds are passively managed index funds that track changes in a certain body of securities in the stock and bond markets. These investment options were specified in TSP's statute, which also provided for adding investment options, via amendments, at the request of TSP's Board. In addition, TSP's law restricted the amounts that could be invested in the C and F funds through 1990.With the lifting of the restriction in 1991, employees have increased their contributions to the C and F funds. For example, in January 1991 about 5 percent and 2 percent of contributions were going into the C and F funds, respectively, while in August 1994 the comparable rates were 35 percent and 10 percent. In January 1995, TSP contributions and earnings were invested as shown in table 1. TSP's three funds have had different average annual rates of return since 1987. The C fund has averaged 12.5 percent, a higher return than the F and G funds' average earnings of about 8.0 percent each over the 7 years of plan experience. The C and F funds also have been more volatile than the G fund as shown in figure 1. Figure 1 shows that a $1,000 investment in the C fund on January 1, 1987, would grow to $2,452 over the following 7 years based on actual annual rates of return. Similarly, $1,000 investments in the F and G funds would grow to $1,836 and $1,868, respectively, over the same period. The higher returns available from the C fund also connote the somewhat higher risks inherent in a stock portfolio. Thus, the retirement income TSP ultimately provides a participant will depend on how much the individual has contributed and on the rates of return earned on those contributions. Since returns and risks are related, the ability to diversify investments among stocks and bonds is an important factor for participants in a program such as TSP because it allows them to tailor their investment portfolios to reflect the level of risk they are willing to assume. The proportion of FERS-covered employees contributing to TSP has steadily increased. For example, in September 1987 some 219,000 FERS-covered employees (about 38 percent) were making voluntary contributions to TSP; whereas, in September 1994 about 942,000 (76 percent) were doing so. However, the degree of voluntary participation in TSP has varied considerably among salary ranges as shown in table 2. Most of the 300,000 (24 percent) FERS-covered employees who did not make any voluntary contributions were lower-paid workers. Historically, such employees have been less likely to make voluntary contributions than have employees in the middle and higher salary ranges. However, as the table shows, the lower salary ranges have shown the greater increase over time in the percentage of individuals who make contributions. Overall, in 1993 FERS-covered employees making voluntary contributions were deferring an average of 5.7 percent of their salaries compared with 3.7 percent in 1987. The deferral rates varied from 4.4 percent of their salaries for low-wage employees to 7.2 percent for the highest-wage employees as table 3 shows. Also, as with the percentage of employees making contributions, deferral rates vary among salary groups. The deferral rate among employees in the lower salary range has also increased the least compared with the rates of the other employees since 1987--about 27 percent compared with over 50 percent for all but the highest salary range. The 41-percent increase in the highest salary range may be partly due to the statutory inflation-adjusted cap on annual contributions, which was $8,994 for 1993. Our analysis showed a disparity in the extent to which higher- and lower-paid employees under FERS may need to contribute to TSP to achieve total FERS retirement benefits that would be commensurate with their preretirement standard of living. In general, lower-paid workers may achieve retirement income goals, or total benefits that are in the range of 60 to 80 percent of final annual earnings, with minimal TSP deferral rates, while higher-paid workers need to defer at correspondingly higher rates. A July 1986 Congressional Research Service report included illustrative comparisons of the replacement rates under FERS and CSRS for various retirement assumptions and TSP benefits from (1) just the mandatory agency 1-percent contribution and (2) employee voluntary contributions of 5 percent. In our analysis, we updated the Congressional Research Service's illustration for employees retiring after 30 years of service at age 62. Our analysis showed that such employees with earnings in the lower salary ranges might achieve a level of FERS benefits that would be within 60 to 80 percent of final annual earnings with just their agencies' mandatory 1-percent contribution but that employees in the higher salary ranges would not. However, using conservative assumptions of TSP returns of 6.1 percent, contributions of 5 percent throughout their careers would also provide higher-paid employees with an overall FERS replacement rate within this range as shown in table 4. Again, the disparity in the total replacement rates largely results from the varying level of benefits that Social Security provides to individuals in different earnings brackets. As table 4 shows, the Social Security replacement rate is just 14 percent for an employee aged 62 with final pretax wages of $100,000 but over twice as high (35 percent) for someone with final wages of $20,000. Furthermore, table 4 shows that a 5-percent deferral provides a total FERS replacement rate for higher-paid workers that is in the lower end of the range that pension professionals believe is needed (that is, the 64 and 68 percent shown in table 4). These lower replacement rates may not reflect such individuals' retirement income goals and, consequently, these employees would need to contribute more than 5 percent to TSP to achieve a higher level of total FERS benefits. In general, the lower TSP's investment earnings are the more an individual would need to contribute in order to reach a certain total FERS replacement rate goal; conversely, higher TSP returns would provide individuals with a higher retirement income than they projected as their goal at a given deferral rate. For example, using TSP's actual average rate of return of 8.95 percent for the period 1988 to 1994 produces TSP replacement rates that are about 50 percent higher than those shown in table 4. The TSP Board produces and provides to federal agencies a variety of educational materials for their employees. Among other things, these leaflets, pamphlets, and brochures emphasize the monetary benefits of TSP, such as the advantages of tax deferral, the effects of compounding, and the higher returns possible from beginning to make contributions early in one's career. In addition, these materials inform employees about the pros and cons, including potential risks, of investing in each of TSP's three funds and the earnings history of each fund. However, TSP's educational materials are not explicit in discussing the importance of employee TSP contributions in achieving total FERS retirement benefits that would be commensurate with preretirement living standards, that is, benefits in the range of 60 to 80 percent of earnings. For example, the materials do not include illustrative examples of FERS replacement rates at varying TSP deferral rates and their effect on total FERS benefits. Private sector plans have such examples in their educational materials. Were TSP's Board to revise its materials to include that type of example, it would need to do so in collaboration with the federal Office of Personnel Management (OPM), which has some responsibility for overall FERS education, including establishing training programs for agency retirement counselors. In May 1995, TSP's Board decided to seek legislation that would add two investment options: an indexed domestic small capitalization equity fund and an indexed international equity fund. The Board selected these funds because they add diversity and provide the opportunity for greater returns than the current options though at somewhat increased risk. Adding the two funds would make TSP's number of investment options and mix more like those provided under private sector section 401(k) plans. TSP's Board began looking into the possibility of increasing the number of investment options in 1992 after the statutory restrictions on C and F fund investments expired. Among other things, the Board reviewed the investment options generally available under section 401(k) plans and the returns and risks associated with them. On average, most private sector section 401(k) plans offer four or more investment options that include a number of bond and stock funds of varying risk. The Board's actions to broaden TSP's investment options are consistent with pension professionals' beliefs that employees should have a variety of investment options encompassing a range of risks and returns to provide the opportunity for higher earnings that would increase their retirement nest eggs. The new options would allow TSP participants to diversify their investments. The new funds would complement the C fund, which has historically outperformed the G and F funds by an average of about 4.5 percentage points since 1987. Proposed legislation to add the options was introduced in the Senate on July 27, 1995, and in the House of Representatives on September 12, 1995. TSP was designed to provide one source of retirement income for FERS-covered employees. However, unlike the two other FERS components whose benefits are determined by formula and are constant for individuals with the same work histories, TSP's benefits will vary according to the amounts that employees have contributed and the investment returns on those contributions. Because of the effects of Social Security's benefit formula, higher-paid workers will be more dependent on TSP income than lower-paid workers in maintaining their standard of living in retirement. TSP's educational materials, however, are not explicit in making this distinction. These materials should explain and provide examples of contribution rates and their relationship to preretirement earnings and potential retirement income. TSP was also designed to be a retirement savings vehicle for federal employees that is similar to section 401(k) plans for workers in the private sector. The addition of the indexed domestic small capitalization equity and indexed international equity funds will provide federal employees the same opportunity that those in the private sector have for tailoring their investment portfolios to reflect the returns they seek and the risks they are willing to undertake. We recommend that to help ensure that TSP participants have investment opportunities similar to those available under comparable private sector plans, the Congress enact legislation adding the two investment options sought by TSP's Board. We recommend that the Board, in collaboration with OPM, include in TSP's educational materials (1) an explanation of TSP's pivotal role in enabling employees under FERS to achieve their retirement income goals and (2) explicit illustrations of the effects of TSP deferral rates on total FERS benefits. The Federal Retirement Thrift Investment Board provided written comments on a draft of this report (see app. II). The Board disagreed with our recommendation that TSP's educational materials include an explanation of TSP's role in FERS and explicit examples of the effect of TSP deferral rates on total FERS benefits. The Board stated that such actions by TSP would constitute employee education about FERS, which is an OPM responsibility under the FERS statute. The Board noted that its educational materials are replete with illustrations that show the dramatic effect of contributions and investment earnings on the size of an employee's TSP account. However, the Board added that the materials do not analyze or explain the impact that employee TSP accounts will have on total FERS retirement income because FERS legislation gave that responsibility to OPM. Also, the Board provided some technical comments that we incorporated in the report as appropriate. While OPM has some responsibility for FERS education, such as establishing training programs for agency retirement counselors, we do not agree that authority to educate employees on the effects of TSP investments on their total FERS benefits is vested exclusively in OPM. We continue to believe that the Board is in a better position to develop educational materials that include explicit examples of TSP's potential effects on FERS retirement income. Such examples would demonstrate TSP's pivotal role in the context of FERS, particularly given the effect of Social Security's benefit formula. For example, an OPM booklet on FERS includes examples of replacement rates for four individuals retiring at various ages, with differing work histories of federal and nonfederal service, and with TSP deferral rates of 3 and 5 percent. However, while the examples are helpful in showing the increased benefits derived from contributions at 5 percent compared with 3 percent, they are not explicit in demonstrating TSP's significance in overall FERS benefits at retirement. Without its FERS context, we believe the value of TSP's educational materials to the individual employee is greatly diminished. Furthermore, TSP is the appropriate source for such information because it periodically contacts all employees who participate in the plan--including those not making any voluntary contributions. Accordingly, we believe that TSP should prepare such educational materials. OPM officials stated that the Board could do so in collaboration with OPM. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 5 days after its issue date. At that time, we will send copies of this report to other congressional committees and members with an interest in this matter and to others upon request. Our review was performed under the direction of Donald C. Snyder, Assistant Director. Other contributors were Endel P. Kaseoru, Evaluator-in-Charge, and evaluators Carolina M. Morgan and Gregory Curtis. If you or your staff have any questions about this report, please call me on (202) 512-7215 or Mr. Snyder on (202) 512-7204. We calculated illustrative FERS replacement rates for each of the program's three components--the basic FERS annuity, Social Security benefits, and TSP--for employees retiring with 30 years of service at age 62, the average federal retirement age in 1994 for regular retirements. To make our calculations, we simulated the salary histories of five hypothetical federal employees and estimated the annuities they would receive under certain assumptions. The time frame for our analysis was 1986 through 2015. To produce the salary histories for our model, we used wage growth rates that are consistent with federal General Schedule salaries. The workers in our model began their federal careers in 1986 at entry-level salaries for GS-2, -3, -5, -7, and -9 and retired in January 2016 at age 62 with final annual salaries, as measured in 1995 dollars, of $20,000, $30,000, $45,000, $75,000, and $100,000. We first created an inflation-adjusted earnings history for these workers and then converted it to current year earnings using the actual inflation rates from 1986 to 1995 and 3.4 percent thereafter. To determine employees' FERS annuities, we used the basic FERS annuity formula in the law. However, while the formula computes the benefit at 33 percent of the average of the highest 3 consecutive years' salaries, the replacement rate is less than 33 percent because the estimated wages grow in each of the 3 years prior to retirement; thus, the 3-year average used to calculate the annuity is lower than the final year's wages. To calculate Social Security benefits, we used the "ANYPIA" software program provided by the Social Security Administration's Office of the Actuary. In applying this program, we used the alternative I assumptions of future economic activity from the 1994 report of the Board of Trustees of the Federal Old Age and Survivors Insurance and Disability Insurance Trust Funds. The alternative I assumptions are conservative, and thus they produced replacement rates that were lower by 1 to 5 percentage points than the rates produced by alternatives II and III. To calculate the TSP replacement rates, we estimated the balance in the individuals' accounts at retirement based on employee and agency contributions of 5 percent each and the agency-only 1-percent contribution. For our baseline analysis, we assumed that the accounts earned a conservative return of 6.1 percent, the same rate the Congressional Research Service used in its analysis. We also calculated replacement rates using a weighted average of actual TSP returns from 1988 to 1994 of 8.95 percent. This higher annual rate of return produced TSP replacement rates that were about 50 percent higher for each salary level. We then calculated an annuity for each account balance using a worksheet in TSP's annuities booklet. We assumed an increasing single life annuity at 6-percent interest, the rate used in TSP's worksheet. The replacement rates we computed, shown in table 4, vary by final year wage because each had a different growth rate over the 30 years we modeled. We also tested different rates of wage growth, returns on TSP, and the FERS annuity and found the results were consistent across the five final salaries we modeled. 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. 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Pursuant to a congressional request, GAO provided information on the Federal Employee Retirement System (FERS), focusing on: (1) the extent to which employees under FERS voluntarily contribute to the Thrift Savings Plan (TSP); (2) how well TSP educational materials address the importance of employee participation; and (3) whether there should be additional TSP investment options. GAO found that: (1) as of September 1994, about 76 percent of FERS employees voluntarily contributed an average of 5.7 percent of their salaries to TSP; (2) most of the non-contributing employees were in lower pay grades; (3) lower paid workers contribute less of their salaries to TSP because social security benefits are proportionally higher for lower income workers; (4) these workers may not need to contribute as much to TSP in order to maintain their preretirement standard of living; (5) mid- and high-pay level workers need to contribute at least 5 percent of their salaries over their careers to achieve 60 to 80 percent of preretirement income; (6) although TSP educational materials extensively discuss the plan's financial aspects, they do not explicitly discuss the importance of employee participation in TSP; (7) the TSP Board is seeking legislation that would add two stock fund options to the three investment options it already offers in order to make these options more similar to those available in private-sector plans; and (8) although they carry a higher investment risk, these new investment options could potentially produce higher earnings for plan participants.

OMB's Uniform Guidance was issued on December 26, 2013, and became effective on December 26, 2014. The Uniform Guidance establishes the principles for defining, calculating, and negotiating ICRs for federally funded research. The guidance describes the classification and types of allowable indirect costs; methods of allocating such costs; reasonableness of claimed costs; and exclusions and descriptions of unallowable cost elements, such as alcohol and bad debt. The Uniform Guidance also provides the basis for OMB to systematically collect information from federal agencies on all their federal financial assistance programs and establishes federal policies for providing this information to the public. NSF implements the Uniform Guidance using its Proposal and Award Policies and Procedures Guide and Grant General Conditions. The guide consists of NSF's proposal preparation and submission guidelines as well as NSF's policy and procedures used to award, administer, and monitor grants and cooperative agreements. NSF awards are subject to the Grant General Conditions, which list awardee responsibilities, obligations, and rights, and other conditions for awards. In addition, NSF's CAAR staff use the Indirect Cost Rate Proposal Review Standing Operating Guidance as a guide for reviewing and negotiating indirect cost proposals from the awardees for which NSF has cognizance. The internal guidance includes descriptions of the three stages of ICR proposal review. Briefly these stages are: 1. Intake and Adequacy Review: This stage consists of steps for processing an incoming proposal including verifying that NSF has rate cognizance for the awardee and entering the proposal into the MTD, conducting initial reviews, and assigning the proposal to staff for review and rate negotiation. 2. Proposal Analysis and Rate Negotiation: This stage consists of steps for reconciling total expenditures in the financial statements with the total expenditures in the indirect cost proposal, reviewing indirect costs, verifying unallowable costs, preparing a trend analysis (including the organization's indirect costs and rates for the previous 2 years, if available), and negotiating the indirect rate with the awardee. 3. Rate Approval and Issuance: This stage consists of steps for approving the indirect rate, preparing and transmitting the rate agreement to the awardee for signature, and closing out the proposal review by updating the MTD and filing working papers in appropriate files. Additionally, NSF's internal guidance includes tools to assist awardees in preparing ICR proposals and to expedite NSF's review process. These tools, as explained in further detail later in the report, are to be used in coordination with federal regulation and NSF guidance. For fiscal year 2000 through fiscal year 2016, the percentage of total annual award funding that NSF budgeted for indirect costs varied from year to year. This variation was based on various factors, such as by the types of activities supported by the awards and the types of organizations receiving the awards. Budgeted indirect costs on NSF awards ranged from 16 to 24 percent of the total annual amounts the agency awarded for fiscal years 2000 through 2016. The percentage fluctuated during this period, though it has generally increased since reaching a low point in 2010. In fiscal year 2016, NSF awards included approximately $1.3 billion budgeted for indirect costs, or about 22 percent of the total $5.8 billion that NSF awarded. Budgeted indirect costs were 16 percent of total annual amounts twice during the 17-year period--in fiscal years 2002 and 2010--and reached their highest point of 24 percent of total annual amounts in fiscal year 2015. Figure 1 illustrates annual funding for direct and indirect costs over the 17-year period. Indirect costs on individual awards within a given year varied more widely than the year-to-year variation for all NSF awards. Most NSF awards included indirect costs in their budgets--for example, the budgets for about 90 percent of the 12,013 awards that NSF made in fiscal year 2016 included indirect costs. Our analysis indicated that the funding for indirect costs ranged from less than 1 percent to 59 percent of the total award. Among the organizations whose ICR files we examined at NSF, examples of awards with indirect costs of less than 1 percent included awards to organizations that provided funding for (1) student travel to a networking workshop for women on computer and network systems and (2) a university workshop on modeling magnetic interactions between stars and planets. In contrast, examples of awards with indirect costs that ranged from 50 to 59 percent included awards to (1) a small business to study the atmosphere and improve current models of air quality and climate change and (2) a policy research organization to study how to broaden participation of underrepresented groups in the academic disciplines of science, technology, engineering, and mathematics. NSF officials told us that the overall composition of NSF's awards portfolio varies from year to year and that indirect costs as a percentage of budgeted total award costs for any given year will reflect that variation. In particular, officials said that variation in indirect costs among individual awards--and thus variation in total award costs from year to year--can be due to several factors: Type of award supported activity: NSF's awards support various types of activities, and NSF allows awardees to budget for indirect costs on these activities to varying degrees. For example, it does not allow indirect costs on its awards for stipends and travel of participants in NSF-sponsored conferences or training projects. In contrast, NSF allows administrative and clerical salaries to be allowed as indirect costs. However, these salaries may be considered direct costs if, for example, administrative or clerical services are integral to an activity or the costs are not recovered as an indirect costs. Type of research: NSF supports a range of research activities, some of which require investment in expensive infrastructure such as a telescope to study the universe. Which research activities are funded each year depends on a variety of considerations including the types of proposals submitted, the objectives of scientific research, the outcome of the merit review process, and available funding. Type of disciplinary field: NSF supports research in biological sciences, engineering, and social sciences, among others, and the level of indirect costs associated with awards in these fields can vary, according to NSF officials. In our analysis of awards made in fiscal year 2016, we found that the indirect costs varied among the NSF directorates that focus on different disciplinary fields. For example, budgeted indirect costs as a percentage of total annual amounts of awards were 22.5 percent in the directorate for engineering and 26.3 percent in the directorate for geosciences. Type of organization: NSF's data categorized awardees as federal, industry, small business, university, or other--a category that includes nonprofits and individual researchers. Figure 2 illustrates our analysis on the average percentage of total awards budgeted for indirect costs in fiscal year 2016, by type of awardee. As shown in the figure, university awardees had the highest average indirect costs-- about 27 percent of the total amount of awards--and federal awardees had the lowest average indirect costs--about 8 percent of the total amount of awards. According to NSF officials, certain types of projects, such as those carried out at universities, typically involve more indirect costs than others. They said that this outcome is because, for example, of the universities' expense for maintaining scientific research facilities, which may be included as an indirect cost in awards. Universities accounted for about 91 percent of the approximately $1.3 billion NSF budgeted for indirect costs in fiscal year 2016. Awards to organizations for which NSF had cognizance (e.g., non-profits, professional societies, museums, and operators of large shared-use facilities) averaged lower budgeted indirect costs than awards to organizations for which other federal agencies had cognizance (e.g., universities for which HHS or DOD have cognizance). According to NSF officials, this variance resulted from differences in the organizations and the types of awards they receive and does not reflect differences in how agencies negotiate ICRs. As shown in figure 3, our analysis of NSF data indicates that on average, NSF budgeted about 23 percent of award amounts for indirect costs on awards to organizations for which NSF did not have indirect cost cognizance and about 11 percent for indirect costs on awards to organizations for which NSF had cognizance. In fiscal year 2016, NSF made over 90 percent ($5.4 billion of $5.8 billion) of its awards to organizations for which it did not have cognizance. NSF has developed internal guidance for setting ICRs, but NSF staff have not consistently followed it. In addition, the internal guidance on supervisory review does not include certain details and procedures. Specifically, the guidance does not include the criteria to be used by the supervisor for risk assessment and mitigation and the steps for reviewing and documenting the work performed by NSF staff when setting ICRs. It also does not include procedures for implementing new provisions issued under the Uniform Guidance and for performing oversight of the ICRs set by Interior on NSF's behalf. Standards for Internal Control in the Federal Government states that management should design control activities, such as controls to ensure the accuracy and completeness of an entity's data, and implement the controls through guidance, including guidance on each office's responsibility for an agency's operational processes. NSF has designed control activities for setting ICRs and has implemented them through internal guidance, such as Indirect Cost Rate Proposal Review Standing Operating Guidance. Our review of a nongeneralizable sample of seven NSF ICR agreement files showed that NSF staff followed many parts of the agency's internal guidance. For example, as required by the internal guidance, NSF staff reviewed awardees' cost policy statements to obtain an understanding of awardees' accounting systems, cost allocation methods, and types of costs charged as either direct or indirect prior to setting ICRs. However, NSF staff did not follow two aspects of NFS's internal guidance for setting ICRs: Use of tools and templates for setting ICRs: In accordance with NSF's internal guidance, NSF has developed tools and templates along with procedures for using these tools to help staff conduct consistent reviews of the ICR proposals. For example, NSF's internal guidance includes procedures for NSF staff to use a standard document checklist to verify that the awardee's ICR proposal package is complete and that all required documents have been submitted. However, in our review of seven NSF ICR agreement files, we found that in all cases, staff did not use the standard document checklist to verify that the awardee had submitted all required documents. Instead, NSF staff used five different versions of the document checklist to track the receipt of the documents. Although these five versions of the document checklist contained similar awardee documentation, we also identified differences. For example, some checklists required certifications of lobbying costs and indirect costs, and others did not. According to the Uniform Guidance, awardees are required to submit these certifications with their proposals for ICRs. The staff were not consistently using the tools and templates NSF had developed because, according to NSF officials, NSF had not yet required them to do so. Without fully implementing this aspect of their guidance by requiring staff to use the standard tools and templates, the agency does not have assurance that NSF staff are consistently collecting required documentation from awardees and that ICRs are being set in accordance with federal requirements. Updating the Monitoring Tracking Database with current information: We identified instances where NSF staff did not consistently follow internal guidance for updating the MTD with current data about (1) the awardees for which NSF has cognizance and (2) the status of ICR proposals. NSF's internal guidance requires staff to verify in the MTD that NSF has cognizance over the awardee prior to negotiating an ICR and to update information such as the date of receipt of the ICR proposal. In reviewing MTD reports, we identified 6 of 102 awardees for which NSF was the cognizant agency that were not included on a list of awardees for which NSF had cognizance. NSF officials confirmed that NSF was the cognizant agency for the six awardees and that the MTD had not been updated, which resulted in the awardees being incorrectly omitted from the database report. Additionally, we identified instances where NSF staff had not followed guidance to update the current status of awardees' proposals, including instances where the MTD was missing either the received date or both the received and closed dates. NSF officials said that such errors resulted from either the agency's incomplete reconciliation of the database, which NSF normally conducts on an annual basis after the end of the fiscal year, or from data entry errors. In order to achieve the agency's objectives and adhere to requirements in federal internal control standards, it is essential for management to have accurate and complete ICR operational data. With accurate operational data for management to use in their decision making process, NSF could better ensure that it is managing the process for setting ICRs efficiently and in accordance with its internal guidance. NSF's internal guidance includes various details on its control activities for setting ICRs, such as details on confirming the mathematical accuracy of the rates proposed and reconciling the total costs in the proposal, both allowable and unallowable, to the total costs shown on audited financial statements. As described in Standards for Internal Control in the Federal Government, including an appropriate level of such details allows for effective monitoring of an organization's control activities. Specifically, through monitoring, management can assess the quality of work performed and promptly resolve any issues identified. However, we identified two areas of supervisory activities in which the procedures established by NSF did not include this level of detail. In particular, NSF's existing internal guidance on supervisory activities, which are a key part of the agency's control activities for setting ICRs, did not include details on (1) the criteria to be used by the supervisor to assess the risk level of a proposal and determine the types of review steps to be performed by staff for each risk level and (2) the steps that the supervisor needs to take when reviewing and documenting the work performed by NSF staff to set ICRs. According to NSF officials, risk assessments are typically performed by the supervisor for each proposal submitted and are intended to provide the basis for determining the scope of the ICR review, including the steps to be performed to mitigate the identified risks. NSF's internal guidance includes procedures for performing risk assessment, such as reviewing past issues in the ICR negotiation for an awardee and changes in the awardee's accounting system. According to NSF officials, part of conducting the risk assessment includes the supervisor's categorizing the identified risk in levels of high, medium, or low and determining steps for staff to perform to mitigate risks at each level. In our sample of seven NSF ICR agreement files we reviewed, the supervisor used various criteria for assessing risks, such as NSF's funding levels and the awardee's rate history. Depending on the risk level, the supervisor directed staff to perform additional review steps, such as transaction testing. However, NSF's internal guidance does not include these details on the criteria for the supervisor to use when categorizing the level of risk and the steps for mitigating the risks at each level. Supervisory review is a type of control activity that aids in providing reasonable assurance that staff follow agency procedures for setting ICRs. NSF's internal guidance includes broad procedures for supervisory review, such as requiring the supervisor to review the staff's completed proposal package and the applicable rates and document any concerns identified during the review; however, the guidance does not include details on what steps the supervisor needs to perform when (1) reviewing the completed proposal package and applicable rates, and (2) annotating the results of the review in the working papers. For example, the internal guidance does not include procedures requiring the supervisor to ensure that staff have adequately performed and documented key controls identified in the internal guidance, such as analyzing trends in awardees indirect costs. In our review of seven NSF ICR agreement files, we found that the files included documents supporting key controls such as trend analysis; however, we did not find any documentation that the supervisor had reviewed the work performed by staff and annotated the results of the reviews. In a September 2016 report, we identified similar issues in which agencies lacked detailed supervisory procedures, resulting in supervisors approving rates that were set by staff who did not perform control activities required by agencies' internal guidance. NSF officials explained that the office that sets ICRs is relatively small-- consisting of a single supervisor and several staff who review ICR proposals--and that as a result, supervisory activities are not as fully documented in guidance as they would be in a larger office. Additionally, the officials stated that because of the complexity of the ICR setting process, the supervisor directly discusses any concerns about a completed proposal package with the staff instead of documenting such concerns. However, more detailed internal guidance on supervisory activities could help NSF management ensure that ICRs are set consistently and in accordance with federal guidance and decrease the risk that the supervisor could approve rates that were not properly executed by staff--for example, when a new person assumes the supervisory position, as occurred in 2016. We found that NSF internal guidance does not include (1) procedures for implementing new provisions issued under the Uniform Guidance and (2) procedures in its internal guidance for performing oversight of the ICRs set by Interior on NSF's behalf. The Uniform Guidance became effective for grants awarded on or after December 26, 2014, and NSF implemented the Uniform Guidance through its policies and procedures. The Uniform Guidance included several new provisions for research organizations, such as an option to apply for a onetime extension of an ICR for up to 4 years and an option to use a de minimis ICR of 10 percent if the organization has not previously had a negotiated ICR with the cognizant agency. However, NSF's internal guidance for setting ICRs does not include specific procedures that NSF staff should perform to implement certain aspects of the Uniform Guidance's new provisions. For example, the internal guidance does not specify criteria for determining whether an awardee is eligible for an extension. NSF officials stated that they updated the internal guidance to include Internet links to the Uniform Guidance and that they expect NSF staff to speak to a supervisor for clarification on questions about applying the new provisions. However, the links in the internal guidance directed staff to outdated OMB guidance rather than to the Uniform Guidance. NSF officials stated that they had incorrectly added links in the guidance. By adding procedures in its internal guidance for implementing the new provisions, NSF could better ensure that NSF staff will apply the provisions correctly in accordance with the Uniform Guidance. Standards for Internal Control in the Federal Government states that management should establish and operate monitoring activities for its internal control system and evaluate the results. In addition, when an entity engages an external party to perform certain operational processes, management retains responsibility for monitoring the effectiveness of internal control activities performed by the external party. NSF has engaged an external party to provide assistance in negotiating ICRs. Specifically, in 2009, NSF entered into an interagency agreement with Interior to negotiate ICRs for a portion of the awardees for which NSF has cognizance. For the first 10 months of fiscal year 2017, Interior had negotiated ICRs for approximately 33 percent of the awardees for which NSF had cognizance. According to NSF officials, Interior, acting as an agent for NSF, has the responsibility for reviewing ICR proposals and setting ICRs directly with awardees, following OMB requirements. In addition, NSF's internal guidance states that Interior will set ICRs in accordance with NSF protocols. However, according to NSF officials and internal guidance, Interior's approval and signing of ICRs are largely independent of NSF, and in addition, NSF conducts limited monitoring of the ICRs that Interior negotiates. For example, NSF officials said that they review monthly summaries of rates negotiated by Interior and completed rate agreements and that on request, they meet with Interior's supervisors and participate in problem resolution. However, they do not review Interior's ICR files, such as checking the adequacy of documentation submitted by awardees or the accuracy and reasonableness of the calculations and resulting rates proposed by the awardee. NSF officials stated that it was their understanding that by entering into the interagency agreement, they delegated the authority for performing ICR proposal reviews and setting ICRs to Interior. However, under Standards for Internal Control in the Federal Government, NSF still retains cognizance and oversight responsibilities for the ICRs set by Interior. By including procedures in its internal guidance for overseeing work performed by Interior, NSF could ensure that the ICRs set by Interior comply with federal guidance and NSF protocols. Setting ICRs in accordance with federal guidance is important to ensuring that federal agencies do not pay more than their share of awardees' indirect costs. NSF has developed internal guidance to help ensure that ICRs are set appropriately, and NSF staff follow many parts of the guidance. However, staff have not consistently followed the guidance for using certain tools and templates for setting ICRs or guidance for updating the agency's database to reflect the status of awardees and their ICR proposals--for example, because NSF has not yet required them to do so. Details on supervisory activities are also not included in the guidance, including the criteria used by the supervisor for assessing the risk level of a proposal and determining specific steps for mitigating risks, and steps supervisors take for their reviews of work performed to set ICRs. Additionally, the guidance does not include procedures necessary to carry out new provisions of the Uniform Guidance and to monitor the ICRs set by Interior on NSF's behalf to ensure that they comply with federal guidance and NSF protocols. NSF officials described ways that staff implement these procedures even though the procedures are not fully detailed or included in guidance. However, including the missing details and procedures in NSF's internal guidance, and requiring staff to follow the guidance, could help NSF ensure that staff properly and consistently negotiate ICRs and that the rates negotiated comply with applicable federal guidance, which in turn would help ensure that the funding provided for indirect costs does not unnecessarily limit the amount available for research. We are making the following three recommendations to NSF: The Director of NSF should require staff to follow written internal guidance for (1) using tools and templates NSF has developed for the process for setting indirect cost rates and (2) updating the agency's database to reflect the status of awardees for which NSF has cognizance and of indirect cost rate proposals. (Recommendation 1) The Director of NSF should add details to NSF's internal guidance for setting indirect cost rates specifying (1) the criteria to be used by the supervisor for assessing the level of risk and steps for mitigating the risks at each level and (2) the steps for supervisory review of the process for setting indirect cost rates and documentation of the results of the review. (Recommendation 2) The Director of NSF should add procedures to NSF's internal guidance for (1) implementing the applicable new provisions of the Uniform Guidance, including updating links to OMB guidance, and (2) monitoring the indirect cost rates that the Department of Interior sets on NSF's behalf. (Recommendation 3) We provided a draft of this report to NSF and Interior for review and comment. In its comments, reproduced in appendix I, NSF concurred with our recommendations and described actions it would take to address them. These actions include updating and adding details and procedures to its internal guidance for setting ICRs, reviewing and updating the tracking database on a quarterly basis, and working with Interior to establish procedures for monitoring ICRs set by Interior on NSF's behalf. NSF stated that these actions will improve NSF's protocols for negotiating ICRs. Interior stated that it did not have comments on our draft report. We are sending copies of this report to the appropriate congressional committees; the Director of the National Science Foundation; Secretary of the Department of the Interior; 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 John Neumann 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 II. In addition to the contacts named above, key contributors to this report were Joseph Cook, Assistant Director; Kim McGatlin, Assistant Director; Rathi Bose; Ellen Fried; Cindy Gilbert; Ruben Gzirian; Terrance Horner, Jr.; Diana Lee; David Messman; Kathryn Smith; and Sara Sullivan. NIH Biomedical Research: Agencies Involved in the Indirect Cost Rate- Setting Process Need to Improve Controls. GAO-16-616. Washington, D.C.: September 2016. Federal Research Grants: Opportunities Remain for Agencies to Streamline Administrative Requirements. GAO-16-573. Washington, D.C.: June 2016. Grants Management: Programs at HHS and HUD Collect Administrative Cost Information but Differences in Cost Caps and Definitions Create Challenges. GAO-15-118. Washington, D.C.: December 2014. Biomedical Research: NIH Should Assess the Impact of Growth in Indirect Costs on Its Mission. GAO-13-760. Washington, D.C.: September 2013. University Research: Policies for the Reimbursement of Indirect Costs Need to be Updated. GAO-10-937. Washington, D.C.: September 2010. National Institutes of Health Extramural Research Grants: Oversight of Cost Reimbursements to Universities. GAO-07-294R. Washington, D.C.: January 2007.

NSF awards billions of dollars to institutions of higher education (universities), K-12 school systems, industry, science associations, and other organizations to promote scientific progress by supporting research and education. NSF reimburses awardees for direct and indirect costs incurred for most awards. Direct costs, such as salaries and equipment, can be attributed to a specific project that receives an NSF award. Indirect costs, such as the costs of operating and maintaining facilities, are not directly attributable to a specific project but are necessary for the general operation of an awardee's organization. For certain organizations, NSF also negotiates ICR agreements, which are then used for calculating reimbursements for indirect costs. ICR negotiations and reimbursements are to be done in accordance with federal guidance and regulation and NSF policy. GAO was asked to review the amount of NSF funding for indirect costs and NSF's negotiation of ICRs. This report examines (1) what is known about indirect costs on NSF awards over time, and (2) the extent to which NSF has implemented guidance for setting ICRs for organizations over which it has cognizance. GAO reviewed relevant regulations, guidance, and agency documents; analyzed budget data and a nongeneralizable sample of nine ICR files from fiscal year 2016 selected based on award funding; and interviewed NSF officials. For National Science Foundation (NSF) awards during fiscal years 2000 through 2016, budgeted indirect costs varied from 16 to 24 percent of the total annual amounts the agency awarded. The percentage fluctuated during this period, though this percentage generally has increased since reaching a low point in 2010. The variation from year-to-year was based on various factors such as by the types of activities supported by the awards and the types of awardee organizations receiving the awards. Note: Award funding has not been adjusted for inflation. NSF has developed internal guidance for setting indirect cost rates (ICR) but has not consistently implemented this guidance and has not included certain details and procedures, in particular: NSF has not consistently implemented its guidance because it has not yet required NSF staff to follow aspects of its guidance, such as using a documentation checklist that NSF developed to verify that an awardee's ICR proposal package is complete. NSF did not include details on supervisory activities, such as the criteria to be used by the supervisor of the ICR process for assessing an ICR proposal's risk level and mitigating risks at each level. NSF did not include certain procedures, such as for implementing new provisions of federal guidance on setting ICRs. NSF officials described ways that staff implement procedures even though the procedures are not fully detailed or included in guidance. Nevertheless, with complete guidance that includes the missing details and procedures and that is consistently followed, NSF could better ensure that ICRs are set consistently and in accordance with federal guidance on indirect costs and with federal internal control standards. GAO recommends that NSF take three actions to improve its guidance for setting ICRs, including adding certain details and procedures. NSF concurred with GAO's recommendations and described plans to address them.

Unmanned aircraft systems generally consist of (1) multiple aircraft, which can be expendable or recoverable and can carry lethal or non-lethal payloads; (2) a flight control station; (3) information and retrieval or processing stations; and (4) in some cases, wheeled land vehicles that carry launch and recovery platforms. DOD categorizes these systems based on key characteristics including weight and operating altitude. While there were many small, less expensive unmanned aircraft in DOD's portfolio, our review focused on the larger, more costly programs. At that time, these programs accounted for more than 80 percent of DOD's total investment in unmanned aircraft from fiscal year 2008 through fiscal year 2013. DOD's 2011 budget request indicates that the department plans to invest nearly $25 billion from 2010 through 2015 in development and procurement of the unmanned aircraft systems we reviewed. Table 1 details many of the key characteristics and funding requirements of those systems. See appendix I for additional program data. Despite the proven success of unmanned aircraft on the battlefield and the growing demand for the aircraft, these acquisitions continued to incur cost and schedule growth. The cumulative development cost for the 10 programs we reviewed increased by over $3 billion, or 37 percent, from initial estimates. While 3 of the 10 programs had little or no development cost growth and one had a cost reduction, six experienced substantial growth ranging from 60 to 264 percent. This cost growth was in large part the result of changes in program requirements and system designs after initiating development. Many of the programs began system development with unclear or poorly defined requirements, immature technologies, and unstable designs--problems we have frequently found in other major acquisition programs. For example, in 2001, the Air Force began the Global Hawk program based on knowledge gained from a demonstration program, and planned to incrementally integrate more advanced technologies over time. Within a year, however, the Air Force fundamentally restructured and accelerated the program to pursue a larger, unproven airframe with a multimission capability that relied on immature technologies. The final design of the new airframe required more substantial changes than expected. These changes ultimately drove development costs up nearly threefold. Procurement costs also increased for 6 of the 7 systems that reported procurement cost data. Although in large part the cost increases were due to the planned procurement of additional aircraft, many programs had also experienced unit cost increases independent of quantity. As detailed in table 2, overall procurement unit costs increased by 12 percent on average, with three programs experiencing unit cost growth of 25 percent of more. The Reaper and Shadow had unit cost growth despite increased quantities. Reaper's unit costs increased in part because requirements for missiles and a digital electronic engine control were added--resulting in design changes and increased production costs. Unit cost increases in the Shadow program were largely the result of upgrades to the airframe that were needed to accommodate the size, weight, and power requirements for integrating a congressionally mandated data link onto the aircraft. Furthermore, the Army is retrofitting fielded systems with capabilities that it had initially deferred, such as a heavy fuel engine. A number of programs had experienced problems in both testing and performance, requiring additional development that contributed to the cost growth noted above. Four programs had experienced delays of 1 to nearly 4 years in achieving initial operational capability. Some of these delays resulted from expediting limited capability to the warfighter, while others were the result of system development and testing problems. For example, early demonstration and production Global Hawks were rushed into operational service. Program officials noted that as a result, the availability of test resources and time for testing were limited, which delayed the operational assessment of the original aircraft model by 3 years. Similarly, in February 2009, the Air Force reported that initial operational testing for the larger, more capable Global Hawk aircraft and the program's production readiness review had schedule breaches. Air Force officials cite the high level of concurrency between development, production, and testing; poor contractor performance; developmental and technical problems; system failures; and bad weather as key reasons for the most recent schedule breach. Consistent with DOD's framework for acquiring unmanned systems, some of the tactical and theater-level unmanned aircraft acquisition programs we reviewed had identified areas of commonality to leverage resources and gain efficiencies. For example, the Army and Marine Corps achieved full commonality in the Shadow program. In assessing options for replacing an aging tactical unmanned aircraft system, the Marine Corps determined that the Army's Shadow system could meet its requirements for reconnaissance, surveillance, and target acquisition capabilities without any service-unique modifications. An official from DOD's Office of Unmanned Warfare emphasized that the Marine Corps believed that Shadow represented a "100 percent" solution. The Marine Corps also found that it could use the Army's ground control station to pilot the Shadow aircraft as well as other Marine Corps unmanned aircraft. A memorandum of agreement was established in July 2007 to articulate how the Marine Corps and the Army would coordinate to acquire Shadow systems. By forgoing any service-unique modifications in order to achieve a high level of commonality, the Marine Corps avoided the costs of developing the Shadow. Additionally, the Marine Corps and Army are likely to realize some benefits in supporting and maintaining the systems because the components are interchangeable. The Army's Shadow program office agreed that commonality has allowed the two services to realize economies of scale while meeting each service's needs. According to an official at the Navy, the Marine Corps has been able to realize savings or cost avoidance in other areas such as administration, contracting, and testing, although quantitative data on these savings were not available. In some cases, the services had collaborated to identify common configuration, performance, and support requirements, but ultimately were not maximizing efficiencies. For example, the Army and Navy had different data link requirements for their respective variants of Fire Scout, primarily because of the Army's requirement for its variant to operate within the Future Combat Systems network. According to the Fire Scout contractor, the Army's system could have been equipped with the same data link as the Navy Fire Scout, as well as the Army's Shadow and Sky Warrior systems, and placed into service sooner. Though the services had not agreed on a common data link, the Army and Navy had settled on common Fire Scout requirements for the air vehicle, engine, radar, navigation, and some core avionics subsystems requirements. The services had also agreed to use one contract to procure the airframe. However, in an information letter sent to members of Congress on January 11, 2010, the Army noted that it had terminated the Fire Scout portion of its FCS contract--following a decision by the Office of the Secretary of Defense (OSD) to cancel the FCS program--because analysis indicated that an improved Shadow system could meet future Army requirements, and the Fire Scout was no longer needed. Cancellation of the Army Fire Scout could lead to increased unit cost for the Navy variant. Although the Navy BAMS and Air Force Global Hawk programs had identified commonalities between their airframes, the two programs had established different payload, subsystem, and ground station requirements. The Navy anticipated spending more than $3 billion to modify the Global Hawk airframe and ground stations, and to integrate Navy-specific payloads, including the radar. In addition, we found that the Navy had an opportunity to achieve greater efficiency in BAMS production. While production of the first two BAMS aircraft was planned to occur at the same California facility that produces Global Hawk, the remaining aircraft were expected to be produced at a facility in Florida. We pointed out that this approach might create duplication in production by staffing and equipping two facilities to conduct essentially the same work. At the time of our review the Navy had not assessed the costs or benefits of establishing a second production facility, and according to contractor officials, the official business case analysis would not be conducted for several years. Therefore, it was unclear whether any benefits of a second production facility would outweigh costs, such as additional tooling and personnel. In contrast to the examples of the Shadow, Fire Scout, and BAMS / Global Hawk programs above, the Army and Air Force missed opportunities to achieve commonality and efficiencies between their Sky Warrior and Predator programs. In 2001, the Army began defining requirements for a replacement to the aging Hunter unmanned aircraft system, and decided to pursue the development of Sky Warrior. Both the Air Force and the Joint Staff responsible for reviewing Sky Warrior's requirements and acquisition documentation raised concerns about duplicating existing capability-- specifically, capability provided by Predator. Nevertheless, the Army program received approval to forgo an analysis of alternatives that could have determined whether or not existing capabilities met its requirements. The Army noted that such an analysis was not needed and not worth the cost and effort. Instead, it conducted a source selection competition and began the Sky Warrior development program in 2005, citing battlefield commanders' urgent need for the capability. The development contract was awarded to the same contractor working with the Air Force to develop and produce Predators and Reapers. Since the Sky Warrior is a variant of the Predator, the two aircraft are assembled in the same production facility. Despite the establishment of a memorandum of understanding in 2006, direction from the Deputy Secretary of Defense in 2007 to combine their programs, and a subsequent memorandum of agreement, the Army and Air Force maintained separate programs and at the time of our review, had achieved little commonality. While several of the unmanned aircraft programs we examined had achieved commonality at the airframe level, service-centric acquisition processes and ineffective collaboration resulted in service-unique subsystems, payloads, and ground control stations. Despite DOD's efforts to encourage a joint approach to identifying and prioritizing warfighting needs and to emphasize the need for commonality among the programs, we noted that the individual services continued to drive requirements and make independent resource allocation decisions. In many cases, the services had established requirements so specific that they demanded service-unique solutions, thereby precluding opportunities for commonality. Within DOD's funding system, each service has the responsibility and authority to prioritize its own budget, allowing it to make independent funding decisions to support unique requirements. Therefore, once a service concludes that a unique solution is warranted, the service has the authority to budget for that unique solution, to the exclusion of other solutions that might achieve greater commonality and efficiencies. While we recognized that service-unique requirements appeared to be necessary in some cases, one OSD official we spoke with emphasized concerns that some of the services' distinctions in requirements could lead to duplication and inefficiencies. However, OSD had not quantified the potential costs or benefits of pursuing various alternatives, including commonality. In 2007, OSD established the Unmanned Aircraft Systems Task Force and the Office of Unmanned Warfare primarily to facilitate collaboration and encourage greater commonality among unmanned aircraft programs. While the two groups act as advisors and have implemented OSD's recommendations regarding areas where further commonality might be achieved key officials from these groups emphasized to us that they do not have direct decision-making or resource allocation authority. OSD repeatedly directed the Army and Air Force to collaborate on their Sky Warrior and Predator programs, but the services continued to pursue unique systems. In response to OSD direction to merge their unique signals intelligence payload efforts into a single acquisition program, the Army and Air Force concluded that continuing their separate programs was warranted, and recommended that OSD direct an objective, independent organization--such as a federally funded research and development center--to conduct a business case analysis to assess the impact of merging the two programs. Table 3 summarizes OSD's directions and the services' responses over the past few years. Congress and OSD took additional action in 2009 aimed at increasing collaboration and commonality among unmanned aircraft programs. In section 144 of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, Congress directed "he Secretary of Defense, in consultation with the Chairman of the Joint Chiefs of Staff, establish a policy and an acquisition strategy for intelligence, surveillance, and reconnaissance payloads and ground stations for manned and unmanned aerial vehicle systems. The policy and acquisition strategy shall be applicable throughout the Department of Defense and shall achieve integrated research, development, test, and evaluation, and procurement commonality." In an acquisition decision memorandum issued on February 11, 2009, the Under Secretary of Defense for Acquisition, Technology and Logistics identified the opportunity to adopt a common unmanned aircraft ground control station architecture that supports future capability upgrades through an open system and modular design. Similar to OSD's approach to ground control stations, the Air Force Unmanned Aircraft Systems Task Force expected future unmanned aircraft to be developed as open, modular systems to which new capabilities could be added instead of developing entirely new systems each time a new capability is needed. Since July 2009 when our report was issued, DOD has made several key investment decisions regarding unmanned aircraft systems that will likely impact those estimates. In general, these decisions reflect increased emphasis on developing more advanced unmanned aircraft capabilities and acquiring larger numbers of specific systems, but they do not appear to focus on increasing collaboration or commonality among systems. The 2010 Quadrennial Defense Review (QDR) reported that "U.S. forces would be able to perform their missions more effectively--both in the near-term and against future adversaries--if they had more and better key enabling capabilities at their disposal." The QDR report included unmanned aircraft systems among these key enablers, and emphasized the importance of rapidly increasing the number and quality of unmanned aircraft systems--among other enablers--to prevail in today's wars, and to deter and defeat aggression in anti-access environments. The report also noted that: the Air Force is going to increase the total number of Predator/Reaper aircraft it plans to buy; the Army will accelerate the production of its Predator-class Sky Warrior system; and the Navy will conduct field experiments with prototype versions of its Unmanned Combat Aircraft System, which, the QDR points out, offers the potential to greatly increase the range of strike, and intelligence, surveillance, and reconnaissance (ISR) operations from the Navy's carrier fleet. As part of DOD's fiscal year 2011 budget development process, OSD made several unmanned aircraft-related adjustments to the services' budget submissions. As part of those adjustments, OSD: Directed the Army to stop development and initial fielding of its Fire Provided the Air Force an additional $344 million from FY2011 to FY2015 to develop, procure, and integrate counter-communication and counter-improvised explosive device jamming pods onto 33 MQ-9 Reaper aircraft, and directed the Air Force to present its assessment of platforms for this capability by June 1, 2010; Provided an additional $1.8 billion from FY2011 through FY2015 to purchase an additional 74 MQ-9 Reaper aircraft; Added $2 billion to the Navy budget from FY2013 to FY2015 to define requirements and develop unmanned carrier based capability, and directed the Navy to develop an execution plan by March 30, 2010; Added $201.6 million to the Global Hawk procurement budget to procure 19 Block 40 aircraft by 2015, and 22 total; Added $270.5 million for development and procurement of Global Hawk satellite communication terminals; Added $2.4 billion over the Future Years Defense Program to the Army's Extended Range Multi-Purpose (Sky Warrior) Aircraft budget to procure an additional 12 aircraft and 5 ground stations (one company) per year from 2011 through 2015. In concert with the QDR and the fiscal year 2011 budget, DOD also published its first submission of a long-range, fixed-wing aviation procurement plan. Among other things, the plan addresses DOD's strategy for meeting the demand for persistent, unmanned, multi-role ISR capabilities by: Emphasizing "long-endurance, unmanned ISR assets--many with strike capabilities--to meet warfighter demands; Projecting an increase in the number of platforms in this category from approximately 300 in 2011 to more than 800 in 2020, nearly 200 percent increase; Noting the "replacement of Air Force Predators with more capable Establishing a specific category for Unmanned Multi-role Surveillance and Strike systems, that distinguishes those systems from other types of aircraft, such as fighters and bombers; Noting that the department will continue to adapt the mix of unmanned and manned systems as security needs evolve; and Noting that unmanned systems are being considered as future long- range strike platforms and future fighter / attack aircraft. In closing, recent experience in Iraq and Afghanistan has proven that unmanned aircraft are extremely valuable to the warfighter, and it is clear that more are needed. However, DOD will continue to be challenged to meet this increasing demand within available resources. Many of DOD's larger unmanned aircraft acquisition programs have experienced cost growth, schedule delays, and performance shortfalls, while not enough have achieved the efficiencies one might expect from commonality. DOD recognizes that to more effectively leverage its acquisition resources, it must achieve greater commonality among the military services' various unmanned system programs. However, in many cases the services have preferred to pursue unique solutions. In general, the military services continue to establish unique requirements and prioritize resources while foregoing opportunities to achieve greater efficiencies. As a result, commonality has largely been limited to system airframes, and in most cases, has not been achieved among payloads, subsystems, or ground control stations. Opportunities for identifying commonality are greatest when requirements are being established. Therefore, as the department continues to develop and procure unmanned aircraft systems, it must take more care in setting requirements for those systems. Rather than looking for unique solutions to common problems, DOD must increasingly find common solutions to those problems. However, we recognize that commonality is not a panacea, and in some cases, given legitimate differences in operating environments or mission needs, may not make sense. We also recognize that achieving commonality is not always easy, especially given the strong service-driven acquisition processes and culture within the department. Therefore, in our July 2009 report we recommended that DOD (1) direct an objective, independent examination of unmanned aircraft requirements and report a strategy to Congress for achieving greater commonality among systems and subsystems, and (2) require future unmanned aircraft programs to take an open systems approach to product development and to clearly demonstrate that potential areas of commonality have been analyzed and identified. We believe that these steps could help overcome these barriers and could go a long way to ensuring that DOD maximizes efficiency as it continues to greatly increase emphasis on developing and acquiring more capable and larger quantities of unmanned aircraft. For further questions about this statement please contact Michael J. Sullivan at (202) 512-4841. Individuals making key contributions to this statement include Bruce Fairbairn, Assistant Director; Travis Masters; Rae Ann Sapp; Leigh Ann Nally; Laura Jezewski; and Susan Neill. This appendix contains 3 tables that provide additional information about the 8 unmanned aircraft systems assessed in our July 2009 report. Table 4 contains the combined total development and procurement funding DOD has requested in its fiscal year 2011 budget submission for each of the programs. The budget data is presented in then year dollars and may not add precisely due to rounding. Tables 5 and 6 detail many of the key characteristics and compare the capabilities of the systems discussed in this statement.

For the last several years, the Department of Defense (DOD) has planned to invest billions of dollars in development and procurement of unmanned aircraft systems. In its fiscal year 2011 budget request the department indicated a significant increase in these investments, expecting to need more than $24 billion from 2010 through 2015. DOD recognizes that to leverage its resources more effectively, it must achieve greater commonality among the military services' unmanned aircraft system acquisition programs. This testimony is based primarily on GAO's July 2009 report (GAO-09-520) which examined 10 unmanned aircraft acquisition programs: eight unmanned aircraft systems--Global Hawk, Reaper, Shadow, Predator, Sky Warrior, Fire Scout, Broad Area Maritime Surveillance, and Unmanned Combat Aircraft System-Demonstration; and two payload development programs--Multi-Platform Radar Technology Insertion Program, and Airborne Signals Intelligence Payload. The testimony focuses on: 1) the cost, schedule, and performance progress of the 10 programs as of July 2009; 2) the extent to which the military services collaborated and identified commonality among the programs; 3) factors influencing the effectiveness of the collaboration; and, 4) recent DOD investment decisions related to these acquisitions. Most of the 10 programs reviewed had experienced cost increases, schedule delays, performance shortfalls, or some combination of these problems. The programs' development cost estimates increased by more than $3 billion collectively, or 37 percent, from initial estimates. Procurement funding requirements for most programs also increased, primarily because of increases in numbers of aircraft being procured, changes in system requirements, and upgrades and retrofits to fielded systems. Procurement unit costs increased by an average of 12 percent, with three aircraft programs experiencing unit cost increases of 25 percent or more. Four programs reported delays of 1 year or more in delivering capability to the warfighter. Global Hawk, Predator, Reaper, and Shadow had been used in combat operations with success and lessons learned, but had been rushed into service in some cases, leading to performance issues and delays in development and operational testing and verification. Programs collaborated and identified areas of commonality to varying degrees. The Marine Corps was able to avoid the cost of initial system development and quickly deliver useful capability to the warfighter by choosing to procure existing Army Shadow systems. The Navy expected to save time and money on Broad Area Maritime Surveillance (BAMS) by using Air Force's Global Hawk airframe, and payloads and subsystems from other programs. However, Army and Air Force had not collaborated on their Sky Warrior and Predator programs, and might have achieved greater savings if they had, given that Sky Warrior is a variant of Predator and being developed by the same contractor. DOD encouraged more commonality between these programs. Although several programs achieved airframe commonality, service-driven acquisition processes and ineffective collaboration were key factors that inhibited commonality among subsystems, payloads, and ground control stations, raising concerns about potential inefficiencies and duplication. Despite DOD's efforts to emphasize a joint approach to identifying needs and commonality among systems, most of the programs assessed continued to pursue service-unique requirements. The services also made independent resource allocation decisions to support their unique requirements. DOD had not quantified the costs and benefits associated with pursuing commonality among these programs, and efforts to collaborate had produced mixed results. However, in order to maximize acquisition resources and meet increased demand, Congress and DOD have continued to push for more commonality. Since July 2009, DOD has made several investment decisions regarding unmanned aircraft systems, which in general, reflect increased emphasis on developing advanced capabilities and acquiring larger numbers of specific systems. However, the decisions do not appear to focus on increasing collaboration or commonality among the programs.

The SSO program covers all states with fixed guideway systems operating in their jurisdictions. FTA defines a rail fixed guideway system as any light, heavy, or rapid rail system, monorail, inclined plane, funicular, trolley, or automated guideway that is not regulated by the Federal Railroad Administration (FRA) and is included in FTA's calculation of fixed guideway route miles, or receives funding under FTA's formula program for urbanized areas, or has submitted documentation to FTA indicating its intent to be included in FTA's calculation of fixed guideway route miles to receive funding under FTA's formula program for urbanized areas. Figure 1 shows the types of systems that are included in the SSO program. Figure 1 shows the types of systems that are included in the SSO program. In the SSO program, state oversight agencies are responsible for directly overseeing rail transit agencies. As of December 2009, 27 state oversight agencies exist to oversee rail transit in 26 states. According to FTA, states must designate an agency to perform this oversight function at the time FTA enters into a grant agreement for any "New Starts" project involving a new rail transit system, or before a transit agency applies for FTA formula funding. States have designated several different types of agencies to serve as oversight agencies, including state departments of transportation, public utilities commissions, or regional transportation funding authorities. FTA has a set of rules that an oversight agency must follow, such as developing a program standard that transit agencies must meet, reviewing transit agencies' safety and security plans, conducting safety audits, and investigating accidents. In the program, rail transit agencies are mainly responsible for meeting the program standards that oversight agencies set out for them, which generally include developing a separate safety and security plan, developing a hazard management process, reporting accidents to oversight agencies within 2 hours, and other similar tasks. Under the program, FTA provides limited funding to oversight agencies in only limited instances, generally for travel or training. While oversight agencies are to include security reviews as part of their responsibilities, TSA also has security oversight authority over transit agencies. (See fig. 2 showing roles and responsibilities of participants in the program.) FTA's role in overseeing safety and security of rail transit is relatively limited. FTA relies on a staff member in its Office of Safety and Security to lead the SSO program. A program manager is responsible for the SSO program along with other duties. Additional FTA staff within the Office of Safety and Security assist with outreach to transit and oversight agencies and additional tasks. FTA regional personnel are not formally involved with the program's day-to-day activities, but officials from FTA regional offices help address specific compliance issues that occasionally arise and help states with new transit agencies establish new oversight agencies. FTA also relies on contractors to do many of the day-to-day activities, ranging from developing and implementing FTA's audit program of state oversight agencies to developing and providing training classes on system safety. Rail transit has been one of the safest modes of transportation in the United States. For example, according to DOT, in 2008, 57.7 people were injured traveling in motor vehicle accidents per 100 million miles traveled and 5.5 people were injured in commuter rail accidents per 100 million miles traveled. For rail transit, the rate was 0.5 people injured per 100 million miles traveled. The injury rate on rail transit has varied from 0.2 to 0.9 injuries per 100 million miles traveled since 2002. Also, the Washington Metro Red Line accident this summer marked the first fatalities involving a collision between two rail cars on a U.S. rail transit system in 8 years. However, according to FTA officials, the recent major incidents in Boston, San Francisco, and Washington have increased their concern about rail transit safety. In addition, FTA states that the number of derailments, worker injuries, and collisions has increased on rail transit systems as a whole in the last several years. Our 2006 report found that officials from the majority of oversight and transit agencies with whom we spoke stated that the SSO program enhances rail transit safety. Officials at several transit agencies cited improvements in reducing the number of derailments, fires, and collisions through actions undertaken as a result of their work with state oversight agencies. However, despite this anecdotal evidence, FTA had not definitively shown that the program had enhanced safety because it had neither established performance goals nor tracked performance. Also, FTA had not audited each state oversight agency in the previous 3 years, as the agency had stated it would. Therefore, FTA had little information with which to track oversight agencies' performance over time. We recommended that FTA set and monitor performance goals for the SSO program and keep to its stated schedule of auditing state oversight agencies at least once every 3 years. Although FTA officials pointed out that tracking safety performance would be challenging in an environment where fatalities and incidents were low, they agreed to implement our recommendation. FTA assigned the task to a contractor and said that it would make auditing oversight agencies a priority in the future. We also found that FTA faced several challenges in assuring the effectiveness of the program and recommending improvements to transit agency safety practices. Funding challenges limited staffing levels and effectiveness. Officials at several state oversight agencies we spoke with stated that since FTA provided little to no funding for rail transit safety oversight functions, and because of competing priorities for limited state funds, they were limited in the number of staff they could hire and the amount of training they could provide. While FTA requires that states operate safety oversight programs, capital and operating grants are not available to support existing state oversight agencies once passenger service commences. FTA, however, has begun to provide training for state oversight agency staff. With the current financial crises most states are experiencing, states face increasing challenges in providing adequate funding for state oversight agencies. Also, in our 2006 report, we found that 10 state oversight agencies relied on the transit agencies they oversaw for a portion of their budgets. In those cases, the oversight agencies required that the transit agency reimburse the oversight agency for its oversight expenses. Expertise varied across oversight agencies. The level of expertise amongst oversight staff varied widely. For example, we found that 11 oversight agencies had staff with no previous career or educational background in transit safety or security. Conversely, another 11 oversight agencies required their staff to have certain minimum levels of transportation education or experience, such as having 5 years of experience in the safety field or an engineering degree. In the agencies in which oversight officials had little or no experience in the field, officials reported that it took several years before they became confident that they knew enough about rail transit operations to provide effective oversight-- a process that new staff would likely have to repeat when the current staff leave their positions. Officials from 18 of the 24 oversight agencies with whom we spoke stated that additional training could be useful in providing more effective safety oversight. FTA, under the current system, does not have the authority to mandate a certain level of training for oversight agency staff. In response to our prior recommendation, FTA has created a recommended training curriculum and is encouraging oversight agency staff to successfully complete the curriculum and receive certification for having done so. Staffing levels varied across oversight agencies. The number of staff that oversight agencies devoted to safety oversight also varied. For example, we found that 13 oversight agencies dedicated less than one full- time equivalent (FTE) staff member to oversight. While in some cases the transit agencies overseen were small, such as a single streetcar line, we found one state that estimated it devoted 0.1 FTE to oversight of a transit agency that averaged 200,000 daily trips. Another state devoted 0.5 FTE to overseeing five different transit systems in two different cities. To help ensure that oversight agency staff were adequately trained for their duties, we recommended that FTA develop a suggested training curriculum for oversight agency staff and encourage those staff to complete it. FTA implemented our recommendation and over 50 percent of state oversight agencies have staff who have completed at least the first tier of this training. Still, the number of staff devoted to safety oversight remains potentially problematic. FTA currently does not require that states devote a certain level of staffing or financial resources to oversight; without additional funding from the federal government or another source, and due to the fiscal difficulties most states are now experiencing, it is unlikely states will independently increase staffing for safety oversight. FTA, however, has asked many SSO agencies to perform formal manpower assessments to ensure they have adequate resources devoted to oversight functions. Enforcement powers of oversight agencies varied. The individual authority each state oversight agency has over transit agencies varies widely. While the SSO program gives state oversight agencies authority to mandate certain rail safety practices, it does not give them authority to take enforcement actions, such as fining an agency or shutting down operations. Some states have given their oversight agencies such authority, however. In our 2006 report, we stated that 19 of 27 oversight agencies had no punitive authority, such as authority to issue fines, and those that did have such authority stated that they rarely, if ever, used it. While taking punitive action against a rail transit agency could be counterproductive (by, for instance, withholding already limited funding), several oversight agency officials told us the threat of such action could potentially make their agencies more effective and other DOT modal administrations with safety oversight authority can level fines or take other punitive action against the entities they oversee. Confusion existed about agency responsibilities for security oversight. Our 2006 report also found that the transit and oversight agencies were confused about the role TSA would take in overseeing security and what role would be left to the state oversight agencies, if any. We made recommendations to TSA and FTA to coordinate their security oversight activities. The agencies agreed and FTA officials reported they are now coordinating their audits with TSA. DOT is planning to propose major changes in FTA's role that would shift the balance of federal and state responsibilities for setting safety standards for rail transit agencies and overseeing their compliance with those standards. Based on information provided to us by DOT, the department plans to propose a new federal safety program for rail transit, at an unspecified future date, with the following key elements: FTA, through legislation, would receive authority to establish and enforce minimum safety standards for rail transit systems not already regulated by FRA. States could become authorized to enforce the federal minimum safety standards by submitting a program proposal to FTA and receiving approval of their program. In determining whether to approve state safety programs, FTA would consider a state's capability to undertake rail transit oversight, including staff capacity, and its financial independence from the transit systems it oversees. DOT would provide federal assistance to approved state safety programs. Participating states could set more stringent safety standards if they choose to do so. In states that decide to "opt out" of participation or where DOT has found the program proposals inadequate, FTA would oversee compliance with and enforce federal safety regulations. These changes would give FTA the authority to directly regulate rail transit safety and, in cooperation with the states, to oversee and enforce compliance by rail transit systems with these regulations. These changes would bring its authority more in line with that of other modal administrations within DOT. For example, FRA, Federal Motor Carrier Safety Administration, Federal Aviation Administration, and Pipeline and Hazardous Materials Safety Administration promulgate regulations and technical standards that govern how vehicles or facilities in their respective modes must be operated or constructed. In addition, each of these agencies use federal or state inspectors, or a combination of both, to determine compliance with the safety regulations and guidance they issue. Finally, these agencies can mandate corrective actions and levy fines to transportation operators, among other actions, for noncompliance with regulations. The new program DOT is planning to propose has the potential to address some challenges and issues we cited in our 2006 report. The consideration of staffing levels in deciding whether to approve states' proposed programs and the provision of funds to approved programs could increase levels of staffing. Requiring that participating states not receive funds from transit agencies would make the state agencies more independent of the transit agencies they oversee. Providing FTA and participating states with the authority to enforce minimum federal safety standards across the nation's transit systems could help ensure compliance with the standards and improved safety practices, and might prevent some accidents as a result. While the new program, as envisioned by DOT, may have some potential benefits, our work on the SSO program, other transit programs, and regulatory programs suggests there are a number of issues Congress may need to consider in deciding whether or how to act on DOT's proposal. Roles of the states versus FTA. The following questions would need to be considered when determining whether changes are needed in the balance of federal versus state responsibility for establishing rail transit safety: Are uniform federal standards and nationwide coverage essential to achieving rail transit safety? Which level of government, state or federal, has the capacity to do the job at hand, taking into account such factors as resources and enforcement powers? In addition, shifting federal-state responsibilities for oversight of rail transit safety would bring a number of operational challenges. These include finding the appropriate level of FTA oversight of state programs and allocating costs between the federal government and the states. The new oversight system to be proposed would potentially involve major changes in the way states interact with FTA in overseeing transit safety. The new balance of state and federal responsibilities could take some time for transit agencies to adjust to, especially those that would now be reporting directly to federal officials. Adequate staff with needed skills. FTA would need to ensure it has adequate qualified staff to oversee safety under the new program, especially in states that opt out of participating in the new program. FTA's current safety staff is very small as is the staff devoted to rail transit safety oversight in most state agencies. Building the capability within FTA, its contractors, and these state agencies to develop and carry out the envisioned program would pose a number of challenges. However, the actions FTA has taken in response to our 2006 recommendation to institute a training curriculum for oversight agency staff, would give it a head start on this process. Enforcement. Congress would need to determine which enforcement mechanisms to authorize FTA to use and FTA would need to develop an enforcement approach that makes the best use of these enforcement mechanisms. Other DOT modal administrations with safety oversight responsibilities, such as the Federal Aviation Administration and FRA, are authorized to issue fines or civil penalties to operators that violate regulations. However, transit agencies are usually publicly owned and face many financial challenges. As a result, fines and penalties could be counterproductive to enhancing safety when funding is at a premium and local riders or taxpayers ultimately could bear the cost of fines. Other enforcement tools are options. For example, FRA may order a locomotive, freight car, or passenger car out of service or may send warning letters to individuals if a safety violation is found, among other enforcement actions. Cost. According to FTA officials, their estimates of the total cost of the new program the department plans to propose are very preliminary. Better estimates of what, if any, costs that states would bear under the new system will also be important before moving forward with this proposal. This could include considering any estimated costs the federal government would incur under various scenarios based on how many states opt out and how many new federal employees or contractors would be required under each scenario to act as trainers, inspectors, and administrative staff. Currently, states bear most of the costs for transit safety oversight. Determining these additional costs would be added as the federal and state governments face significant increasing fiscal pressures. Further, it is uncertain how the program will be paid for. Congress will need to determine if riders, states, those who pay taxes to the Highway Trust Fund, or the Department of the Treasury, or a combination of sources, would bear the cost of this program. In addition to the issues that Congress may need to address, FTA would face some challenges in implementing a new system of transit safety oversight. These include: Variations in the different types of transit. The U.S. rail transit system consists of several different types of vehicles, from heavy and light rail to monorails and funiculars or inclined planes. These vehicles operate on different kinds of track with different power sources and can vary from new modern vehicles to vehicles that are 30 or more years old. Setting federal safety regulations for these varying systems could be a lengthy process and could require multiple parallel rulemakings. Transition to the new system. If the new safety oversight system is approved, it will take some time to transition to the new system. States currently performing safety oversight that opt out in favor of federal oversight will likely need to continue to perform their oversight functions until FTA has additional staff and an enforcement mechanism in place. However, a state may be less likely to replace staff who leave or ensure staff in place stay adequately trained if the state is in the process of giving over its oversight responsibilities to FTA. While the likely effect of this may be minimal, this situation could create the possibility of relaxed oversight during the transition period. As part of our ongoing review of challenges to improving rail transit safety, we will review states' and FTA's current efforts to oversee and enhance rail transit safety as well as DOT's efforts to strengthen the federal role in overseeing rail transit safety. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee might have. For further information on this statement, please contact David J. Wise at (202) 512-2834 or [email protected]. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. Individuals making key contributions to this testimony were Catherine Colwell, Judy Guilliams-Tapia, and Raymond Sendejas, Assistant Directors; Timothy Bober; Martha Chow; Antoine Clark; Colin Fallon; Kathleen Gilhooly; David Goldstein; Joah Iannotta; Hannah Laufe; Sara Ann Moessbauer; and Stephanie Purcell. 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.

Rail transit generally has been one of the safest forms of public transportation. However, several recent notable accidents are cause for concern. For example, a July 2009 crash on the Washington Metro Red Line resulted in nine deaths. The federal government does not directly regulate the safety of rail transit. Through its State Safety Oversight program, the Federal Transit Administration (FTA) requires states to designate an oversight agency to directly oversee the safety of rail transit systems. In 2006, GAO issued a report that made recommendations to improve the program. The Department of Transportation (DOT) is planning to propose legislation that, if passed, would result in a greater role for FTA in regulating and overseeing the safety of these systems. This statement (1) summarizes the findings of GAO's 2006 report and (2) provides GAO's preliminary observations on key elements DOT has told us it will include in its legislative proposal for revamping rail transit safety oversight. It is based primarily on GAO's 2006 report, an analysis of key elements of DOT's planned proposal through review of documents and interviews with DOT officials, and GAO's previous work on regulatory programs that oversee safety within other modes of transportation. GAO's 2006 report was based on a survey of the 27 state oversight agencies and transit agencies covered by FTA's program. GAO provided a draft of this testimony to DOT officials and incorporated their comments as appropriate. GAO's 2006 report found that officials from the majority of the state oversight and transit agencies stated that the State Safety Oversight program enhances rail transit safety but that FTA faced several challenges in administering the program. For example, state oversight agencies received little or no funding from FTA and had limited funding for staff. In fact, some required that the transit agencies they oversaw reimburse them for services. Also, expertise, staffing levels, and enforcement powers varied widely from agency to agency. This resulted in a lack of uniformity in how oversight agencies carried out their duties. As of 2006, 13 oversight agencies were devoting the equivalent of less than one full-time employee to oversight functions. Also, 19 oversight agencies GAO contacted lacked certain enforcement authority, such as authority to issue fines, and those that did have such authority stated that they rarely, if ever, used it. DOT is planning to propose major changes in FTA's role that would shift the balance of federal and state responsibilities for oversight of rail transit safety. According to DOT officials, under this proposal, the agency would receive authority to establish and enforce minimum standards although states still could maintain an oversight program. States could become authorized to enforce these standards if FTA determines their program capable and financially independent of the transit system they oversee. FTA would provide financial assistance to approved programs. Such changes would have the potential to address challenges GAO cited in its 2006 report. For example, providing funding to participating state agencies could help them maintain an adequate number of trained staff, and providing FTA and participating states with enforcement authority could help better ensure that transit systems take corrective actions when problems are found. Congress may need to consider several issues in deciding whether or how to act on DOT's proposal. These include determining whatlevel of government has the best capacity to oversee transit safety, ensuring that FTA and state oversight agencies would have adequate and qualified staff to carry out the envisioned program, and understanding the potential budgetary implications of the program.

The diversion and abuse of prescription drugs are associated with incalculable costs to society in terms of addiction, overdose, death, and related criminal activities. DEA has stated that the diversion and abuse of legitimately produced controlled pharmaceuticals constitute a multibillion-dollar illicit market nationwide. One recent example of this growing diversion problem concerns the controlled substance oxycodone, the active ingredient in over 20 prescription drugs, including OxyContin, Percocet, and Percodan. OxyContin is the number one prescribed narcotic medication for treating moderate-to-severe pain in the United States. Currently, a single 20-milligram OxyContin tablet legally selling for about $2 can be sold for as much as $25 on the illicit market in some parts of Kentucky. Combating the illegal diversion of prescription drugs while ensuring that the pharmaceuticals remain available for those with legitimate medical need involves the efforts of both federal and state government agencies. The Controlled Substances Act of 1970 provides the legal framework for the federal government's oversight of transactions involving the sale and distribution of controlled substances at the manufacturer and wholesale distributor levels. The states address these issues through their regulation of the practice of medicine and pharmacy. The Controlled Substances Act established a classification structure for drugs and chemicals used in the manufacture of drugs that are designated as controlled substances. Controlled substances are classified by DEA into five schedules on the basis of their medicinal value, potential for abuse, and safety or dependence liability. Schedule I drugs--including heroin, marijuana, and hallucinogens such as LSD and PCP--have a high potential for abuse and no currently accepted medical use. Schedule II drugs--including methylphenidate (Ritalin) and opiates such as hydrocodone, morphine, and oxycodone--have a high potential for abuse among drugs with an accepted medical use and may lead to severe psychological and physical dependence. Drugs on schedules III through V have accepted medical uses and successively lower potentials for abuse and dependence. Schedule III drugs include anabolic steroids, codeine, hydrocodone in combination with aspirin or acetaminophen, and some barbiturates. Schedule IV contains such drugs as the antianxiety medications diazepam (Valium) and alprazolam (Xanax). Schedule V includes preparations such as cough syrups with codeine. All scheduled drugs except those in schedule I are legally available to the public with a prescription. Under the act, DEA provides legitimate handlers of controlled substances--including manufacturers, distributors, hospitals, pharmacies, practitioners, and researchers--with registration numbers, which are used in all transactions involving controlled substances. Registrants must comply with a series of regulatory requirements relating to drug security and accountability through the maintenance of inventories and records. Although all registrants, including pharmacies, are required to maintain records of controlled substance transactions, only manufacturers and distributors are required to report their transactions involving schedule II drugs and schedule III narcotics, including sales to the retail level, to DEA. The data provided to DEA are available for use in monitoring the distribution of controlled substances throughout the United States, in identifying retail-level registrants that received unusual quantities of controlled substances, and in investigations of illegal diversions at the manufacturer and wholesaler levels. Although data are reported to DEA regarding purchases by pharmacies, the act does not require the reporting of dispensing information by pharmacies at the patient level to DEA. State laws govern the prescribing and dispensing of prescription drugs by licensed health care professionals. State medical practice laws generally delegate the responsibility of regulating physicians to state medical boards, which license physicians and grant them prescribing privileges. In addition, state medical boards investigate complaints and impose sanctions for violations of the state medical practice laws. States regulate the practice of pharmacy based on state pharmacy practice acts and regulations enforced by the state boards of pharmacy. The state boards of pharmacy are also responsible for ensuring that pharmacists and pharmacies comply with applicable state and federal laws and for investigating and disciplining those that fail to comply. According to the National Association of Boards of Pharmacy, all state pharmacy laws require that records of prescription drugs dispensed to patients be maintained and that state pharmacy boards have access to the prescription records. State prescription drug monitoring programs varied in their objectives and operation. While all programs were intended to help law enforcement identify and prevent prescription drug diversion, some programs also included education objectives to provide information to physicians, pharmacies, and the public. Program operation also varied across states, in terms of which drugs were covered and how prescription information was collected. Which agency, such as a pharmacy board or public health department, was given responsibility for the program also varied across states. Additionally, methods for analyzing the data to detect potential diversion activity differed among state programs. State monitoring programs are intended to facilitate the collection, analysis, and reporting of information on the prescribing, dispensing, and use of prescription drugs within a state. The first state monitoring program was established in California in 1940, and the number of programs has grown slowly. We reported that the number of states with programs has grown from 10 in 1992 to 15 in 2002; the number of programs stands at 16 in 2004. We found that state programs varied in their objectives. All states used monitoring programs primarily to assist law enforcement in detecting and preventing drug diversion, and but some also used the programs for educational purposes. Programs assisted law enforcement authorities both by providing information in response to requests for assistance on specific investigations and by referring matters to law enforcement officials when evaluations of program data revealed atypical prescribing or dispensing patterns that suggested possible illegal diversion. The programs evaluated prescribing patterns to identify medical providers who may have been overprescribing and inform them that their patterns were unusual. They also identified patients who may have been abusing or diverting prescription drugs and provided this information to practitioners. For example, the programs in Nevada and Utah sent letters to physicians containing patient information that could signal potential diversion activity, including the number and types of drugs prescribed to the patient during a given time period and the pharmacies that dispensed the drugs. Monitoring programs have also been used to educate physicians, pharmacies, and the public about the existence and extent of diversion, diversion scams, the drugs most likely to be diverted by individuals, and ways to prevent drug diversion. Monitoring programs also differed in operational factors, some of which have cost implications. These factors included the choice of controlled substance schedules monitored, approaches to analyzing and using data, computer programming choices, number and type of staff and contractors, turnaround times and report transmittal methods, and number and type of requests for information. State programs varied in the controlled substances they covered, in part because of differences in available resources and other state-specific factors such as level of drug abuse. Two of the states we studied-- Kentucky and Utah--covered schedules II through V. These states' program officials told us that covering those schedules allowed them flexibility to respond if drugs on other schedules became targets for diversion. Most experts agree that covering all controlled substance schedules prevents drug diverters from avoiding detection by bypassing schedule II drugs and switching to drugs in other schedules. States used different approaches to analyze the prescription information they received. A few states used a proactive approach, routinely analyzing prescription data collected by the programs to identify individuals, physicians, or pharmacies that had unusual use, prescribing, or dispensing patterns that could suggest potential drug diversion, abuse, or doctor shopping. Trend analyses were shared with appropriate entities, such as law enforcement, practitioners, and regulatory and licensing boards. In contrast, most state programs generally used the prescription data in a reactive manner to respond to requests for information. These requests may have come from physicians or from law enforcement or state officials based on leads about potential instances of diversion. According to state program officials, most programs operated in a reactive fashion because of the increased amount of resources required to operate a proactive system. Some state programs had electronic reporting systems, while others were paper-based. If data are reported electronically, there are ongoing computer maintenance and programming choices and their attendant costs. Similarly, some state programs engaged private contractors to collect and maintain the data, while others did so in-house. If a private contractor collects the raw data from dispensers and converts them to a standardized format, the program pays annual contracting costs for database maintenance. Kentucky and Nevada privately contracted with the same company to collect data for their program databases. Utah, in contrast, collected and maintained drug dispensing data in-house, using its own software and hardware. The number and type of staff a state chose to operate its monitoring program also varied. In 2002, Kentucky's program employed four full-time and four part-time staff to help ensure the accuracy of its reports, including a pharmacist-investigator who reviewed each report before it was sent. Nevada's program operated with one employee because a private contractor collected the data. In contrast, in 2002 Utah's program, with three full-time employees and no private contractor, had one program administrator who collected all dispensing data, converted them to a standardized format for monitoring, and maintained the database. The two other staff answered requests. If the program seeks to provide more timely responses to report requests, such as same-day responses, the costs involved in returning the response to the requester may increase. For example, in 2001 Kentucky spent up to $12,000 in 1 month for faxing reports. Monitoring program officials from Kentucky, Nevada, and Utah told us in 2002 that they estimated 3- to 4- hour turnaround times for program data requests, and all mainly used faxing, rather than more costly mailing, to send reports to requesters. Same-day responses may be preferable for physicians who want the prescription drug history for a patient being seen that day and for law enforcement users who need immediate data for investigations of suspected illegal activity. As users become more familiar with the benefits of monitoring program report data, requests for information and other demands on the programs may increase. In Kentucky, Nevada, and Utah, use had increased substantially, mostly because of an increase in the number of requests by physicians to check patients' prescription drug histories. In Kentucky, these physician requests increased from 28,307 in 2000, the first full year of operation, to 56,367 in 2001, an increase of nearly 100 percent. Law enforcement requests increased from 4,567 in 2000 to 5,797 in 2001, an increase of 27 percent. Similarly, Nevada's requests from all authorized users also increased--from 480 in 1997, its first full year, to 6,896 in 2001, an increase of about 1,300 percent. Additionally, as drug marketing practices change and monitoring programs mature, the operational needs may shift as well. For example, states face new challenges with the advent of Internet pharmacies, because they enable pharmacies and physicians to anonymously reach across state borders to prescribe, sell, and dispense prescription drugs without complying with state requirements. In addition, if users want program reports to reflect more timely information, dispensing entities would have to report their data at the time of sale, rather than submitting data biweekly or monthly, to capture the most recent prescription dispensing. If users want to be alerted if a certain drug, practitioner, or pharmacy may be involved in a developing diversion problem, programs would have to initiate periodic data analysis to determine trends or patterns. Such program enhancements would entail additional costs, however, including costs for computer programming, and data analysis. States that are considering establishing or expanding a monitoring program face a variety of other challenges. One challenge is the lack of awareness of the extent to which prescription drug abuse and diversion is a significant public health and law enforcement problem. States also face concerns about the confidentiality of the information gathered by the program, voiced by patients who are legitimately using prescription drugs and by physicians and pharmacists who are legitimately prescribing and dispensing them. Another challenge states face is securing adequate funding to initiate and develop the program and to maintain and modify it over time. We found that states with monitoring programs have experienced considerable reductions in the time and effort required by law enforcement and regulatory investigators to explore leads and the merits of possible drug diversion cases. We also found that the presence of a monitoring program in a state may help reduce illegal drug diversion there, but that diversion activities may increase in contiguous states without programs. The ability of the programs to focus law enforcement and regulatory investigators who are working on suspected drug diversion cases on specific physicians, pharmacies, and patients who may be involved in the alleged activities is crucial to shortened investigation time and improvements in productivity. States that do not have programs must rely on tips from patients, practitioners, or law enforcement authorities to identify possible prescription drug abuse and diversion. Following up on these leads requires a lengthy, labor-intensive investigation. In contrast, the programs can provide information that allows investigators to pinpoint the physicians' offices and pharmacies where drug records must be reviewed to verify suspected diversion and thus can eliminate the need to search records at physicians' offices and pharmacies that have no connection to a case. In each of the three states we studied, state monitoring programs led to reductions in investigation times. For example, prior to implementation of Kentucky's monitoring program, its state drug control investigators took an average of 156 days to complete the investigation of alleged doctor shoppers. Following the implementation, the average investigation time dropped to 16 days, or a 90 percent reduction in investigation time. Similarly, Nevada reduced its investigation time from about 120 days to about 20 days, a reduction of 83 percent, and a Utah official told us that it experienced an 80 percent reduction in investigation time. Officials from Kentucky, Nevada, and Utah told us in 2002 that their programs may have helped reduce the unwarranted prescribing and subsequent diversion of abused drugs in their states. In both Kentucky and Nevada, an increased number of program reports were being used by physicians to check the prescription drug use histories of current and prospective patients when deciding whether to prescribe certain drugs that are subject to abuse. Law enforcement officials told us that they view these drug history checks as initial deterrents-- a front-line defense--to prevent individuals from visiting multiple physicians to obtain prescriptions, because patients are aware that physicians can review their prescription drug history. For an individual who may be seeking multiple controlled substance prescriptions, the check allows a physician to analyze the prescription drug history to determine whether drug treatment appears questionable, and if so, to verify it with the listed physicians. In Kentucky, a physician could request a drug history report on the same day as the patient's appointment, and usually received the report within 4 hours of the request. In 2002, Kentucky's program typically received about 400 physician requests daily, and provided data current to the most recent 2 to 4 weeks. The presence of a monitoring program may also have an impact on the prescribing of drugs more likely to be diverted. For example, DEA ranked all states for 2000 by the number of OxyContin prescriptions per 100,000 people. Eight of the 10 states with the highest numbers of prescriptions-- West Virginia, Alaska, Delaware, New Hampshire, Florida, Pennsylvania, Maine, and Connecticut--had no monitoring programs, and only 2 did-- Kentucky and Rhode Island. Six of the 10 states with the lowest numbers of prescriptions--Michigan, New Mexico, Texas, New York, Illinois, and California--had programs, and 4--Kansas, Minnesota, Iowa, and South Dakota--did not. Another indication of the effectiveness of a monitoring program is that its existence in one state appears to increase drug diversion activities in contiguous states without programs. When states begin to monitor drugs, drug diversion activities tend to spill across boundaries to states without programs. One example is provided by Kentucky, which shares a boundary with seven states, only two of which had programs in 2002--Indiana and Illinois. As drug diverters became aware of the Kentucky program's ability to trace their drug histories, they tended to move their diversion activities to nearby nonmonitored states. OxyContin diversion problems worsened in Tennessee, West Virginia, and Virginia--all contiguous states without programs--because of the presence of Kentucky's program, according to a 2001 joint federal, state, and local drug diversion report. Although monitoring programs can enhance the ability of states to detect and deter illegal diversion of prescription drugs, the number of states with such programs has grown only slightly over the past 12 years from 10 in 1992 to 16 in 2004. A lack of awareness of the magnitude of the problem; concerns about confidentiality on the part of patients, physicians, pharmacists, and legislators; and difficulty in accessing funding have kept the numbers of monitoring programs low. Cooperative efforts at the state and national levels are seeking to overcome these challenges and increase the number of states with programs. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For more information regarding this testimony, please contact Marcia Crosse at (202) 512-7119. Individuals making key contributions to this testimony include Martin T. Gahart, Roseanne Price, and Opal Winebrenner. 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The increasing diversion of prescription drugs for illegal purposes or abuse is a disturbing trend in the nation's battle against drug abuse. Diversion can include such activities as prescription forgery and "doctor shopping" by individuals who visit numerous physicians to obtain multiple prescriptions. The most frequently diverted prescription drugs are controlled substances that are prone to abuse, addiction, and dependence, such as hydrocodone (the active ingredient in Lortab and many other drugs) and oxycodone (the active ingredient in OxyContin and many other drugs). Some states use prescription drug monitoring programs to control illegal diversion of prescription drugs that are controlled substances. GAO was asked to examine (1) how state monitoring programs compare in terms of their objectives and operation and (2) the impact of state monitoring programs on illegal diversion of prescription drugs. This testimony is based on GAO's report, Prescription Drugs: State Monitoring Programs Provide Useful Tool to Reduce Diversion, GAO-02-634 (May 17, 2002). In that report, the programs in Kentucky, Utah, and Nevada were selected for more in-depth study because they were the most recently established programs at the time. GAO found that the 15 state monitoring programs in place in 2002 differed in their objectives and operation. The programs were intended to facilitate the collection, analysis, and reporting of information about the prescribing, dispensing, and use of controlled substances. They provided data and analysis to state law enforcement and regulatory agencies to assist in identifying and investigating activities potentially related to illegal drug diversion. The programs could be used by physicians to check a patient's prescription drug history to determine if the individual was doctor shopping to seek multiple controlled substances. Some programs also offered educational programs for the public, physicians, and pharmacists regarding the nature and extent of the problem and medical treatment options for abusers of diverted drugs. The programs varied primarily in terms of the specific drugs they covered and the type of state agency in which they were housed. Some programs covered only those prescription drugs that are most prone to abuse and addiction, whereas others provided more extensive coverage. In addition, most programs were administered by a state law enforcement agency, a state department of health, or a state board of pharmacy. GAO also found that state monitoring programs may have realized benefits in their efforts to reduce drug diversion. These included improving the timeliness of law enforcement and regulatory investigations. Each of the three states studied reduced its investigation time by at least 80 percent. In addition, law enforcement officials told GAO that they view the programs as a deterrent to doctor shopping, because potential diverters are aware that any physician from whom they seek a prescription may first examine their prescription drug utilization histories based on monitoring program data. For example, as drug diverters became aware of Kentucky's ability to trace their drug histories, they tended to move their diversion activities to nearby nonmonitored states.

The F/A-22 is an air superiority aircraft with advanced features to make it less detectable to adversaries (stealth characteristics) and capable of high speeds for long ranges. It is being developed under contracts with Lockheed Martin Corporation for the aircraft and Pratt & Whitney Corporation for the engine. Because of potential cost increases, the Air Force established a team--the Joint Estimating Team--to review the total estimated cost of the F/A-22 program in 1996. This team reported that the cost of the F/A-22 production program could grow by $13.1 billion from the amount planned. In response to identified cost growth, Congress, in the National Defense Authorization Act for Fiscal Year 1998 established cost limits for the development and production phases of the F/A-22 program. The current production cost limit is $37.5 billion. "Air superiority" is the degree of air dominance that allows the conduct of operations by land, sea, and air forces without prohibitive interference by enemy aircraft. Defense (OSD) and the Air Force, disagreed over how many aircraft could be purchased for $43 billion. OSD believed that only 297 aircraft could be purchased for $43 billion while the Air Force believed 333 aircraft could be purchased for the same amount. DOD informed Congress of these divergent viewpoints in September 2001. The F/A-22 President's Budget for fiscal year 2004 would transfer $876 million in production funding and reduce the number of aircraft to 276 to help fund estimated cost increases in development. As a result, the current production cost estimate is $42.2 billion, an amount that still exceeds the cost limit of $37.5 billion. To fully offset the $13.1 billion in estimated cost growth, the Air Force and contractors designed cost reduction plans. Since 1997, the Air Force has been identifying and implementing these plans. (See appendix IV for a list of the major categories of cost reduction plans designed to offset the cost growth estimated in 1997.) A direct relationship cannot be established between the cost reduction plans and specific areas of cost growth. The reason is that the plans generally offset cost growth in broad areas by enhancing production technology, improving manufacturing techniques, and improving acquisition practices. F/A-22 cost reduction plans are categorized as either "implemented" or "not yet implemented." The Air Force's and contractors' criteria for determining if a cost reduction plan is implemented include whether the contractor has submitted a firm, fixed price proposal that recognizes the impact of the cost reduction; the impact of the reduction has been reflected in a current contract price or negotiated in an agreement; or the contractor has reduced the number of hours allocated to a task. Currently, $14 billion in cost reduction plans is considered "implemented." Cost reduction plans are categorized as "not yet implemented" if the plans are well defined but none of the criteria listed above are met. Table 3 in appendix II shows the amounts the Air Force currently considers "implemented" and "not yet implemented." Over the last 6 years, $17.7 billion in estimated production cost growth has been identified during the course of two program reviews. As a result, the estimated cost of the production program currently exceeds the congressional cost limit despite the establishment of cost reduction plans designed to offset a significant amount of this estimated cost growth. The effectiveness of these cost reduction plans has varied. During a review in 1997, the Air Force estimated cost growth of $13.1 billion. The major contributing factors to this cost growth were inflation, increased estimates of labor costs and materials associated with the airframe and engine, and engineering changes to the airframe and engine. These factors made up about 75 percent of the cost growth identified in 1997. (See appendix III for a complete list of cost growth categories identified in 1997.) In August 2001, DOD estimated an additional $5.4 billion in cost growth for the production of the F/A-22, bringing total estimated production costs to $43 billion. The major contributing factors to this cost growth were again due to increased labor costs and airframe and engine costs. These factors totaled almost 70 percent of the cost growth. According to program officials, major contractors' and suppliers' inability to achieve the expected reductions in labor costs throughout the building of the development and early production aircraft has been the primary reason for estimating this additional cost growth. (See appendix VI for a complete list of the categories and sources of cost growth identified in 2001.) The effectiveness of cost reduction plans has varied. The Air Force was able to implement cost reduction plans and offset cost growth in the first four production lot contracts awarded. Air Force projections for cost reduction plans show that expected offsets are also planned for the future production lot contracts to enable the production program to be completed within the current production cost estimate. However, the Air Force has not fully funded production improvement programs (PIPs), which are designed to offset cost growth by improving production processes. Consequently, planned offsets may not be achieved in the amount expected. The Air Force was able to implement cost reduction plans and offset cost growth in the first four production contracts awarded. The total offsets for these contracts slightly exceeded earlier projections by about $0.5 million. Table 1 compares previous planned offsets with implemented cost reduction plan offsets in the first four production contracts. Cost reduction plans exist but have not yet been implemented for subsequent production lots planned for fiscal years 2003 through 2010 because contracts for these production lots have not yet been awarded. If implemented successfully, the Air Force expects these cost reduction plans to achieve billions of dollars in offsets to estimated cost growth and allow the production program to be completed within the current production cost estimate of $43 billion. However, as we noted earlier in this report, this amount exceeds the congressionally imposed production cost limit of $37.5 billion. A production improvement program is a type of cost reduction plan whereby the government must make an initial investment to realize savings. The earlier the Air Force implements PIPs, the greater the impact on the cost of production. Examples of PIPs previously implemented by the Air Force include manufacturing process improvements for avionics, improvements in the fabrication and assembly processes for the airframe, and the redesign of several components to enable lower production costs. The Air Force reduced the funding available for investment in PIPs because of cost growth in production lots 1 and 2. The Air Force subsequently used funding that it planned to invest in PIPs to cover the cost growth in production lots 1 and 2. As a result, there has not been as much funding available for investment in these PIPs as planned. Figure 1 shows that funding was reduced $61 million in fiscal year 2001 and $26 million in fiscal year 2002. It is unlikely that the Air Force will achieve the estimated $3.7 billion in cost growth offsets from the implementation of these PIPs if investment continues to be less than planned. Figure 2 shows the remaining planned investment in PIPs through fiscal year 2006 and the $3.7 billion in estimated cost growth that can potentially be offset through fiscal year 2010 if the Air Force invests as planned in these PIPs. In the past, Congress has been concerned about the Air Force's practice of requesting fiscal year funding for these PIPs but then using part of that funding for F/A-22 airframe cost increases. Recently, Congress directed the Air Force to submit a request if it plans to use PIP funds for an alternate purpose. We found indications that, in the future, F/A-22 production costs are likely to increase more than the latest $5.4 billion in cost growth recently estimated by the Air Force and OSD. First, the current OSD production estimate does not include all costs. Second, schedule delays in developmental testing could delay the start of a multiyear contract designed to help control production costs. Third, as a result of schedule delays that have already occurred, the Air Force has already delayed the awarding of this contract to fiscal year 2006. As a consequence, the aircraft planned for fiscal year 2005 are not currently included in any agreements with the contractor that are designed to help control production costs. Last, we found several risk factors that may increase future production costs, including the dependency of certain cost reduction plans on congressional action and a reduction in funding for support costs. OSD's latest cost estimate does not include costs identified by the Air Force during the development of the Air Force's current F/A-22 acquisition plan. The Air Force developed this acquisition plan after OSD completed its estimate. Table 2 shows some areas of additional costs that the Air Force believes the program will incur. According to an OSD official, these additional costs should be considered in any future OSD production cost estimate, which would increase OSD's estimate by $1.29 billion. If the F/A-22's developmental testing program experiences additional delays, there is a greater risk that operational testing, full-rate production, and multiyear procurement will be delayed as a result. Delays in production and multiyear procurement would likely increase production costs. The Air Force has not addressed ongoing problems with the developmental testing and therefore remains at high risk for further schedule delays. For example, in March 2002, we reported that the Air Force's plan to complete the developmental airframe testing necessary for the start of operational testing was at high risk because (1) the planned number of test objectives per flight-hour was not being achieved and (2) most of the planned flight-test program was essentially being performed by only one test aircraft rather than the three originally planned. Air Force officials told us they understood that completing the tests as scheduled with only one development test aircraft was high risk. As a result of this strategy, in late 2001, the Air Force delayed the F/A-22's schedule, including the start of a multiyear contract designed to save production costs. The cost of the fiscal year 2005 production lot could increase because it is currently not included in plans to help control production costs. In late 1996, as part of a major program review, the Air Force and major F/A-22 contractors entered into a Target Price Curve agreement designed to help reduce production costs and ensure production affordability. The agreement established production cost goals for the first five production lots (fiscal years 1999-2003) and provided the contractors with incentives if they achieved these cost goals. Previously, the Air Force planned to transition directly to multiyear procurement starting with the next production lot. However, since the Air Force delayed the start of multiyear procurement from fiscal year 2004 to fiscal 2006, fiscal 2005 is now not covered by either the agreement with the contractor or the planned multiyear procurement contract. Therefore, there is less assurance that the cost of the fiscal year 2005 production lot will match the current estimate for this production lot. If a method to help control costs is not implemented for the fiscal year 2005 production lot, the cost of this production lot could increase more than expected. We found several additional risk factors that may increase production costs in the future. As we have also previously reported, the Air Force is depending on both multiyear procurement and the Joint Strike Fighter initiatives to achieve offsets to estimated cost growth. Multiyear procurement, because of the cost reductions available through long-term commitments such as a 5-year contract, make it possible for the contractors and subcontractors to charge lower prices for the aircraft being procured. Joint Strike Fighter-related savings are planned because the Air Force plans to use many of the same contractors and subcontractors as with the Joint Strike Fighter in the F/A-22 program, thereby lowering overhead rates and increasing buying power. Even though the Air Force is depending on both the multiyear procurement and Joint Strike Fighter initiatives to achieve offsets to estimated cost growth, approval to proceed with multiyear procurement is determined from the availability of funding. Thus, if entry into a multiyear procurement contract does not occur as planned, offsets from the implementation of multiyear procurement cannot be achieved. Similarly, the success of the Joint Strike Fighter cost reduction plan is dependent on the schedule of the Joint Strike Fighter program and the quantity of the aircraft procured, which are determined by Congress and OSD. In an earlier report, we cautioned that if the Joint Strike Fighter program were not approved or were delayed, then the F/A-22 production program would not achieve the estimated cost reductions. Furthermore, the Air Force reduced estimated funding for F/A-22 support costs by $1.8 billion in its latest production cost estimate. Support costs are for such items as spare components for the aircraft and engines, spare engines, and equipment used to support and maintain aircraft. F/A-22 program officials explained that the latest support costs estimate is a detailed, requirements-based estimate that is more accurate than previous estimates, but they could not provide us with the detailed rationale for this new estimate. At the same time, we also observed that the Air Force added about $1.8 billion to the estimated production costs associated with the aircraft and engine. If it is determined the F/A-22 program will require the same level of support cost funding identified by the Defense Acquisition Board's review, the production cost estimate will increase. DOD has not fully informed Congress about specifics related to the total cost of the F/A-22 production program or the quantity of aircraft that can be purchased within the cost limitation. DOD uses selected acquisition reports and the President's budget submissions to inform Congress about weapon systems programs. Since 1999, neither the F/A-22 selected acquisition reports nor the President's annual budget submissions to Congress have included details about the amount of cost reduction plans identified to offset cost growth. More importantly, these documents have not included the potential cost of the F/A-22 production program if cost reduction plans do not offset cost growth as planned. From 1996 to 1998, selected acquisition reports did inform Congress about the potential cost of production if cost reduction plans did not offset cost growth as planned. If cost growth is not offset as planned, the cost of F/A-22 production could be several billion dollars higher than currently estimated. Furthermore, recent documentation, including the latest selected acquisition report (December 2001) and Fiscal Year 2003 President's Budget submission have also not provided Congress with information about the quantity of aircraft DOD believes can be procured under the existing production cost limitation. Even though the production cost limitation remains, as adjusted, at $37.5 billion, the official documentation provided to Congress to date has not provided the number of aircraft that can be purchased for this amount. Even at the higher cost estimate of $43 billion, OSD and the Air Force have not been able to agree on the aircraft quantity that can be purchased. In July 2001, we projected that the Air Force would have to buy 85 fewer F/A-22s rather than the 333 that it planned to buy to stay within the cost limit. Despite the success of early cost reduction plans, we identified estimated cost growth beyond the amounts recognized by the Air Force and DOD. Therefore, it is important for the Air Force to take advantage of every opportunity to offset cost growth. PIPs can be an important mechanism for offsetting this cost growth. However, the Air Force is not investing funding as planned in F/A-22 PIPs designed to offset estimated cost growth. The failure to invest in PIPs at the planned level will likely not allow estimated cost growth to be offset as planned and therefore may affect the quantity of aircraft that can be acquired. The F/A-22 production program has experienced a number of schedule delays and problems that have increased the estimated costs of a program that already requires a significant investment. DOD has not fully informed Congress about the amount of cost reduction plans identified to offset cost growth, the potential cost of production if cost reduction plans are not as effective as planned, or the quantity of aircraft that can be produced within the production cost limit. Congress would be able to utilize this information to help exercise proper program oversight. For the Air Force to achieve planned offsets to estimated cost growth, we recommend that the Secretary of the Air Force make the funding of PIPs at the planned level a priority. To ensure proper congressional oversight of the F/A-22 program, we also recommend that the Secretary of Defense provide Congress with documentation showing that funding for PIPs is being invested at the planned level each fiscal year, and if not, explaining the reasons why and the potential consequences of not fully investing and potentially not offsetting cost growth as planned; reflecting the potential cost of F/A-22 production if cost reduction plans do not offset cost growth as planned; and reflecting the quantity of aircraft DOD believes can be procured with the existing production cost limit. In written comments on a draft of this report, DOD stated that it did not concur with either of our recommendations. Regarding our first recommendation on making investments in PIPs a priority, DOD said that while it believes that PIP investments in general are a good idea, the Department intends to implement PIPs on a case-by-case basis, using expected return-on-investment criteria. DOD also commented that our report does not provide evidence that investments in PIPs reduce costs. Our recommendation that the Air Force make the funding of PIPs at the planned level a priority is based on evidence from both the Air Force and OSD that investment in PIPs at the planned level will generate a significant return-on-investment. In addition, during the course of our review, Air Force officials told us they planned to make up for not fully investing in PIPs during the last 2 fiscal years by investing more in subsequent years in order to achieve the planned savings. The Air Force's plan appears to recognize that it has moved beyond a case-by-case approach. Our recommendation would support such a plan. Finally, the reluctance to embrace PIPs in DOD's comments appears to be contrary to the position taken within the Department. The potential benefits of investing in PIPs continue to be highlighted in high-level F/A-22 meetings and correspondence to Congress. A September 2001 letter to Congress from the Under Secretary of Defense for Acquisition, Technology and Logistics estimates that the quantity of F/A-22 aircraft will need to be reduced, but more aircraft can be procured if cost reduction plans (which include PIPs) prove more successful than OSD's estimates. We believe our recommendation to make the funding of PIPs at the planned level a priority puts DOD in a better position to enhance the affordability of the F/A-22. Conversely, by not funding PIPs at the planned level, DOD may lose opportunities to create greater production efficiencies and as a result, have to acquire fewer aircraft. Regarding our second recommendation related to providing documentation to Congress on cost reduction plans, the implications of not investing in PIPs as planned, and the aircraft quantities that can be acquired within the existing production cost limit, DOD stated that our recommendation is inconsistent with its decision to use a "buy-to-budget" approach for the F/A-22 (buying the highest quantity of aircraft possible each year on the basis of appropriated funding each year). DOD also stated that providing this information to Congress would not provide a reliable projection of the number of aircraft possible because (1) there are other factors that affect cost and (2) the projected savings are uncertain and may not materialize as the estimator expects. We continue to believe that the Secretary of Defense should provide Congress with this documentation. As we have discussed in this and several earlier reports, we agree that there are indeed many factors that can cause F/A-22 production costs to rise. And, as we have also noted, projected offsets generated by PIPs and other cost reduction plans are uncertain and may not all materialize, even if investments are made as planned. Shifts in these realities are frequent and create a constantly changing picture of F/A-22 production costs, offsets, and aircraft quantities. This is particularly the case when PIP investments are not made as planned. Hence, it is important that updated and accurate information be regularly and routinely made available to Congress as the picture changes. DOD's argument that it is implementing a "buy-to-budget" approach makes our recommendation more compelling because aircraft quantities planned each fiscal year can change in the few months between when fiscal year funding is appropriated and when a production contract is negotiated with the prime contractor and awarded. Providing visibility to the projection of how many aircraft can be acquired within the cost limitation would enhance program oversight. DOD has several extant reporting options that can be used to provide this information. A new report is not required. For example, DOD could return to its former practice of using annual selected acquisition reports to inform Congress about the potential cost of production if cost reduction plans do not offset cost growth as planned. This information was included in these reports from 1996 to 1998. In addition, the President's Budget submission could be used as a vehicle to provide Congress with updated information about the quantity of aircraft DOD believes can be acquired under the existing production cost limitation. Finally, requests to reprogram PIP investment funds could be expanded to include this information along with justification for PIP reprogramming. To identify the F/A-22 production cost growth, we examined documents related to the Joint Estimating Team's review completed in January 1997 and received clarification on some review conclusions from the F/A-22 program office. We also reviewed documentation and discussed with program officials the results of the 2001 F/A-22 Defense Acquisition Board's review that estimated $5.4 billion more in production cost growth. To evaluate the planned effectiveness of cost reduction plans designed to offset production cost growth, we assessed the reliability of a contractor's and the Air Force's database on cost reduction plans to ensure that the data were complete, sufficient, and relevant to our work. We reviewed information from this database on implemented and not yet implemented cost reduction plans. We compared estimated cost reduction plan offsets from fiscal years 2000 and 2002 to determine current versus planned estimated offsets for F/A-22 production lots. We also analyzed cost information from the Air Force to determine the amount of planned and actual funding invested in PIPs designed to offset estimated cost growth by improving production processes. To identify areas where additional production cost growth has occurred and may occur, we reviewed several aspects of the F/A-22 program that were likely to contribute to future cost growth. We examined previous and current OSD and Air Force production cost estimates, expected delays in the F/A-22 program's completion of operational testing, aircraft unit price estimates and controls, and funding for support costs. To evaluate the degree to which DOD has informed Congress about the potential cost of F/A-22 production, we examined the content of recent official documentation (selected acquisition reports and President's budgets) provided to Congress and compared them with required content and content that would be expected considering the congressionally imposed F/A-22 production cost limitation. In performing our work, we obtained information or interviewed officials from the Office of the Secretary of Defense, Washington D.C.; the F/A-22 Program Office, Wright-Patterson Air Force Base, Ohio; and the Defense Contract Management Agency, Marietta, Georgia. We performed our work from March 2002 through February 2003 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this report. At that time, we will send copies to interested congressional committees; the Secretary of Defense; the Secretary of the Air Force; and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 or Catherine Baltzell at (202) 512-8001 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix VII. F/A-22 cost reduction plans are categorized as either "implemented" or "not yet implemented." The Air Force and contractors' criteria for determining if a cost reduction plan is implemented include (1) whether the contractor has submitted a firm-fixed price proposal that recognizes the impact of the cost reduction, (2) whether the impact of the reduction has been reflected in a current contract price or negotiated in an agreement, or (3) whether the contractor has reduced the number of hours allocated to a task. Cost reduction plans are categorized as "not yet implemented" if the plans are well defined but none of the criteria listed above are met. Based on a plan to procure 438 aircraft. Cost growth as a percentage $4.60 0.95 0.50 0.25 0.20 69 14 8 4 3 0.14 $6.64 (0.80) Catherine Baltzell, Marvin Bonner, Edward Browning, Gary Middleton, Sameena Nooruddin, Robert Pelletier, and Don M. Springman made key contributions to this report. Tactical Aircraft: F-22 Delays Indicate Initial Production Rates Should Be Lower to Reduce Risks. GAO-02-298. Washington, D.C.: March 5, 2002. Tactical Aircraft: Continuing Difficulty Keeping F-22 Production Costs within the Congressional Limitation. GAO-01-782. Washington, D.C.: July 16, 2001. Tactical Aircraft: F-22 Development and Testing Delays Indicate Need for Low-Rate Production. GAO-01-310. Washington, D.C.: March 15, 2001. Defense Acquisitions: Recent F-22 Production Cost Estimates Exceeded Congressional Limitation. GAO/NSIAD-00-178. Washington, D.C.: August 15, 2000. Defense Acquisitions: Use of Cost Reduction Plans in Estimating F-22 Total Production Costs. GAO/T-NSIAD-00-200. Washington, D.C.: June 15, 2000. Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2001. GAO/OCG-00-8. Washington, D.C.: March 31, 2000. F-22 Aircraft: Development Cost Goal Achievable If Major Problems Are Avoided. GAO/NSIAD-00-68. Washington, D.C.: March 14, 2000. Defense Acquisitions: Progress in Meeting F-22 Cost and Schedule Goals. GAO/T-NSIAD-00-58. Washington, D.C.: December 7, 1999. Fiscal Year 2000 Budget: DOD's Procurement and RDT&E Programs. GAO/NSIAD-99-233R. Washington D.C.: September 23, 1999. Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2000. GAO/OCG-99-26. Washington, D.C.: April 16, 1999. Defense Acquisitions: Progress of the F-22 and F/A-18E/F Engineering and Manufacturing Development Programs. GAO/T-NSIAD-99-113. Washington, D.C.: March 17, 1999. F-22 Aircraft: Issues in Achieving Engineering and Manufacturing Development Goals. GAO/NSIAD-99-55. Washington, D.C.: March 15, 1999. F-22 Aircraft: Progress of the Engineering and Manufacturing Development Program. GAO/T-NSIAD-98-137. Washington D.C.: March 25, 1998. F-22 Aircraft: Progress in Achieving Engineering and Manufacturing Development Goals. GAO/NSIAD-98-67. Washington, D.C.: March 10, 1998. Tactical Aircraft: Restructuring of the Air Force F-22 Fighter Program. GAO/NSIAD-97-156. Washington, D.C.: June 4, 1997. Defense Aircraft Investments: Major Program Commitments Based on Optimistic Budget Projections. GAO/T-NSIAD-97-103. Washington, D.C.: March 5, 1997. F-22 Restructuring. GAO/NSIAD-97-100BR. Washington, D.C.: February 28, 1997. Tactical Aircraft: Concurrency in Development and Production of F-22 Aircraft Should Be Reduced. GAO/NSIAD-95-59. Washington, D.C.: April 19, 1995. Tactical Aircraft: F-15 Replacement Issues. GAO/T-NSIAD-94-176. Washington, D.C.: May 5, 1994. Tactical Aircraft: F-15 Replacement Is Premature as Currently Planned. GAO/NSIAD-94-118. Washington, D.C.: March 25, 1994.

In 1991, the Air Force began developing the F/A-22 aircraft with advanced features to make it less detectable to adversaries and capable of high speeds for long distances. After a history of program cost increases, Congress limited the cost of F/A-22 production to $37.5 billion in 1997. Congress has remained interested in the potential cost of production. As requested, we (1) identified the latest production cost estimate and assessed the planned offsets from cost reduction plans, (2) identified areas where additional cost growth is likely to occur, and (3) determined the extent that DOD has informed Congress about production costs. The Department of Defense (DOD) has identified about $18 billion in estimated production cost growth over the last 6 years. Even though the Air Force has designed cost reduction plans to offset a significant amount of this estimated cost growth, DOD still estimates that the cost of production will exceed the cost limit established by Congress in 1997. Furthermore, the Air Force has not fully funded certain cost reduction plans called production improvement programs (PIPs), and as a result, these PIPs may not achieve their estimated $3.7 billion in offsets to cost growth. In addition to the cost growth estimated by DOD, GAO identified areas where, in the future, F/A-22 production cost growth is likely to occur. First, the Office of the Secretary of Defense's current production cost estimate does not include about $1.3 billion in costs that should be considered in future cost estimates. Second, schedule delays in developmental testing could delay the start of a multiyear contract designed to control costs. These delays could also result in additional costs owing to the expiration of an Air Force agreement with the contractor designed to help control production costs in fiscal year 2005. Last, other risk factors may increase future production costs, including the dependency of certain cost reduction plans on the availability of funding and a reduction in funding for support costs. DOD has not fully informed Congress (1) about what the total cost of the production program could be if cost reduction plans do not offset cost growth as planned or (2) about the aircraft quantity that can be procured within the production cost limit. If the cost limit is maintained and estimated production costs continue to rise, the Air Force will likely have to procure fewer F/A-22s.

As part of a multilayered defense strategy, MTSA required vessels and port facilities to have security plans in place by July 1, 2004, including provisions establishing and controlling access to secure areas of vessels and ports. Given that ports are not only centers for passenger traffic and import and export of cargo, but also sites for oil refineries, power plants, factories, and other facilities important to the nation's economy, securing sensitive sites of ports and vessels against access from unauthorized persons is critical. But because ports are often large and diverse places, controlling access can be difficult. To facilitate access control, MTSA required the DHS Secretary to issue a biometric identification card to individuals who required unescorted access to secure areas of port facilities or to vessels. These secure areas are to be defined by port facilities and vessels in designated security plans they were to submit to the United States Coast Guard (USCG) in July 2004. About 1 year before the passage of MTSA in 2002, work on a biometric identification card began at the Department of Transportation (DOT), partly in response to provisions in the Aviation and Transportation Security Act and the USA PATRIOT Act that relate to access control in transportation sectors. TSA--then a part of DOT--began to develop a transportation worker identification credential (TWIC) as an identity authentication tool that would ensure individuals with such an identification card had undergone an assessment verifying that they do not pose a terrorism security risk. The credential was designed by TSA to be a universally recognized identification card accepted across all modes of the national transportation system, including airports, seaports, and railroad terminals, for transportation workers requiring unescorted physical access to secure areas in this system. The credential is also to be used to help secure access to computers, networks, and applications. As shown in figure 1, ports or facilities could use an identification credential that stored a biometric, such as a fingerprint, to verify a worker's identity and, through a comparison with data in a local facility database, determine the worker's authority to enter a secure area. During early planning stages in 2003 and while still a part of DOT, TSA decided that the most feasible approach to issue a worker identification card would be a cost-sharing partnership between the federal government and local entities, with the federal government providing the biometric card and a database to confirm a worker's identity and local entities providing the equipment to read the identity credential and to control access to a port's secure areas. In 2003, TSA projected that it would test a prototype of such a card system within the year and issue the first of the cards in August 2004. In March 2003, as part of a governmentwide reorganization, TSA became a part of DHS and was charged with implementing MTSA's requirement for a maritime worker identification card. TSA decided to use the prototype card system to issue the maritime identification card required under MTSA. At that time, TSA was preparing to test a prototype card system; later, DHS policy officials directed the agency to explore additional options for issuing the identification card required by MTSA. As a result, in addition to testing its prototype card system, TSA is exploring the cost- effectiveness of two other program alternatives: (1) a federal approach: a program wholly designed, financed, and managed by the federal government and (2) a decentralized approach: a program requiring ports and port facilities to design, finance, and manage programs to issue identification cards. According to TSA documents, each approach is to meet federally established standards for technical performance and interoperability across different transportation modes (such as air, surface, or rail). Appropriations committee conference reports, for fiscal years 2003 and 2004, directed up to $85 million of appropriated funds for the development and testing of a maritime worker identification card system prototype. With respect to fiscal year 2005 appropriations, $15 million was directed for the card program. The fiscal year 2005 funding was decreased from the $65 million as proposed by the House and the $53 million as proposed by the Senate because of delays in prototyping and evaluating the card system, according to the conference committee report. Several forms of guidance and established best practices apply to the acquisition and management of a major information technology system such as the maritime worker identification card program. For major information technology investments, DHS provided capital planning and investment control guidance as early as May 2003 that established four levels of investments, the top three of which are subject to review by department-level boards, including the Investment Review Board (IRB) and the Enterprise Architecture Board. The guidance also laid out a process for selecting, controlling, and managing investments. For example, DHS guidance suggests that as part of the control process, the agency should consider alternative means of achieving program objectives, such as different methods of providing services and different degrees of federal involvement. The guidance recommends that an alternatives analysis--a comparison of various approaches that demonstrates one approach is more cost-effective than others--should be conducted and a preferred alternative selected on the basis of that analysis. For projects like the maritime worker identification card program, whose costs and benefits extend 3 or more years, OMB also instructs federal agencies, including TSA, to complete an alternative analysis as well as a cost-benefit analysis. This analysis is to include intangible and tangible benefits and costs and willingness to pay for those benefits. In addition to DHS and OMB guidance, established industry best practices identify project management and planning best practices for major information technology system acquisition, including the development of a comprehensive plan to guide the project as detailed later in this report. Three main factors, all of which resulted in delays for testing the prototype card system, caused the agency to miss its initial August 2004 target date for issuing maritime worker identification cards. First, program officials said that although they received permission from TSA and DHS information technology officials to test a card system prototype, TSA officials had difficulty obtaining a response from DHS policy officials, contributing to the schedule slippage. Program officials said that although DHS officials reviewed the proposed card system during late 2003, senior officials provided no formal direction to program staff. Senior DHS officials said that while they were consistently briefed throughout the development of the worker identification card system, they did not provide formal direction regarding the prototype test because other important statutory and security requirements required their attention. For example, the creation and consolidation of DHS and the planning and execution of measures to close security gaps in the international aviation arena led to competition for executive-level attention and agency resources. DHS policy officials subsequently approved the test of a card system prototype. Second, while providing this approval, DHS officials also directed TSA, as part of the prototype test, to conduct a cost-benefit analysis and to evaluate the feasibility of other program alternatives for providing a card. TSA had completed these analyses earlier in the project, but DHS officials said they did not provide sufficiently detailed information on the costs and benefits of the various program alternatives. TSA officials said that because of the urgency to establish an identification card program after the terrorist attacks of September 11, 2001, the earlier cost-benefit and alternatives analyses were not completely documented as typically required by OMB regulations and DHS guidance. Working with DHS and OMB officials to identify additional information needed for a cost-benefit analysis and alternatives analysis required additional time, further delaying the prototype test. Third, TSA officials said that before testing the card system prototype, in response to direction from congressional committees, TSA conducted additional tests of various card technologies. Officials assessed the capabilities of various card technologies, such as their reliability, to determine which technology was most appropriate for controlling access in seaports. This technology assessment required 7 months to complete, more time than anticipated, delaying the prototype test. This analysis is typical of good program management and planning and, while it may have delayed the original schedule, the purpose of such assessments is to prevent delays in the future. DHS has not determined when it may begin issuing cards under any of the three proposed program alternatives--the federal, decentralized, or TWIC programs. Because of the delays in the program, some port facilities have made temporary security improvements while waiting for TSA's maritime worker identification card system. Others, recognizing an immediate need to enhance access control systems, are proceeding with plans for local or regional identification cards that may require additional investment in order to make them compatible with TSA's system. For example, the state of Georgia is implementing a state-based maritime worker identification card, and ports along the eastern seaboard are pursuing plans for a regional identification card. TSA officials indicated that in the near future, as they move forward with developing and operating a maritime worker identification card program, they face a number of challenges, including resolving issues with stakeholders, such as how to share costs of the program, determining the fee for the maritime worker identification card, obtaining funding for the next phase of the program. Further, in the coming months, regardless of which approach the DHS chooses--the federal, decentralized, or TWIC approach--TSA will also face challenges completing key program policies, regulatory processes, and other work as indicated in table 1. While TSA officials acknowledged the importance of completing key program policies, for example, establishing the eligibility requirements a worker must meet before receiving a card and processes for adjudicating appeals and requests for waivers from workers denied a card, officials also said that this work had not yet been completed. A senior TSA official and DHS officials said they plan to base these policies and regulations for the maritime worker identification card on those TSA is currently completing for the hazardous materials endorsement for commercial truck drivers. According to a senior TSA official who was in charge of the card program, TSA placed a higher priority on completing regulations for the hazardous materials endorsement than completing those for the maritime worker identification card. TSA has other work to complete in addition to these policies and regulations. TSA officials said OMB recently directed them and DHS officials to develop the TWIC program card in a way that allows its processes and procedures to also be used for other DHS credentialing programs. To develop such a system, DHS expects TSA to standardize, to some degree, eligibility requirements for the maritime worker identification card with those for surface and aviation workers, a task that will be challenging, according to officials. In the near future, TSA will need to produce other work, for instance, it has initiated but not yet finalized cost estimates for the card program and a cost-benefit analysis, which is a necessary part of a regulatory impact analysis required by OMB regulations. Our analysis, however, indicates that TSA faces another significant challenge besides the ones it has identified. This challenge is that TSA is attempting to proceed with the program without following certain industry-established best practices for project planning and management. Two key components of these practices are missing. The first is a comprehensive plan that identifies work to be completed, milestones for completing this work, and project budgets for the project's remaining life. The second is detailed plans for specific and important components of the project--particularly mitigating risks and assessing alternative approaches--that would support the overall project plan. Failure to develop these plans holds significant potential to adversely affect the card program, putting it at higher risk of cost overruns, missed deadlines, and underperformance. Over the years, we have analyzed information technology systems across a broad range of federal programs and agencies, and these analyses have repeatedly shown that without adequate planning, the risks increase for cost overruns, schedule slippages, and systems that are not effective or usable. According to industry best practices for managing information technology projects like the maritime worker identification card, program managers should develop a comprehensive project plan that governs and defines all aspects of the project, tying them together in a logical manner. A documented comprehensive project plan is necessary to achieve the mutual understanding, commitment, and performance of individuals, groups, and organizations that must execute or support the plans. A comprehensive project plan identifies work to be completed, milestones for completing this work, and project budgets as well as identifying other specific, detailed plans that are to be completed to support the comprehensive project plan. The comprehensive plan, in turn, needs to be supplemented by specific, detailed plans that support the plan where necessary. Such plans might be needed to address such matters as the program's budget and schedule, data to be analyzed, risk management and mitigation, staffing. For example, a risk mitigation plan would be important in situations where potential problems exist. One purpose of risk management is to identify potential problems before they occur; a risk mitigation plan specifies risk mitigation strategies and when they should be invoked to mitigate adverse outcomes. Effective risk management includes early and aggressive identification of risks because it is typically easier, less costly, and less disruptive to make changes and correct work efforts during the earlier phases of the project. In addition, plans for activities such as cost-benefit and alternatives analyses should be developed to help facilitate data collection and analysis. These types of plans typically describe, among other things, the data to be collected, the source of these data, and how the data will be analyzed. Such plans are important to guide needed data analysis as well as prevent unnecessary data collection, which can be costly. For this program, both risk mitigation and data analysis are key, because the program runs significant risks with regard to ensuring cooperation of stakeholders, and because TSA still faces considerable analytical work in deciding which approach to adopt. According to TSA officials, the agency lacks an approved, comprehensive project plan to guide the remaining phases of the project, which include the testing of a maritime worker identification card system prototype and issuance of the cards. While it has initiated some project planning, according to officials, the agency has not completed a comprehensive project plan, which is to identify work to be completed, milestones for completing this work, and project budgets as well as identifying other specific, detailed plans that are to be completed. Officials said that with contractor support they intended to develop a plan to manage the prototype test. However, officials did not intend to develop a plan for the remainder of the project until key policy decisions had been made, such as what type of card program will be selected to issue the cards. Once key policies are determined, TSA may move forward with a comprehensive plan. As a consequence of not having such a plan in place, officials have not documented work to be completed, milestones for completing it, or accountability for ensuring that the work is done. Without a comprehensive project plan and agreement to follow the plan from the appropriate DHS and TSA officials, TSA program staff may have difficulty managing future work, putting the program at higher risk of additional delays and cost overruns. Officials did not provide a timeframe for completing such a project plan. According to TSA planning documents and discussions with officials, TSA lacks a risk management plan that specifies strategies for mitigating known risks which could limit TSA's ability to manage these risks. For instance, TSA documents identified failure to sustain the support of external stakeholders, such as labor unions for port workers, as a program risk and indicated a mitigation strategy was needed to address this risk. But, TSA has not developed such a strategy to address this specific risk. TSA documents also indicated that involving stakeholders in decision making could help mitigate program risks associated with defining the eligibility requirements for the card. However, TSA has not planned for stakeholder involvement in decision-making. Several stakeholders at ports and port facilities told us that while TSA solicited their input on some issues, TSA did not respond to their input or involve them in making decisions regarding eligibility requirements for the card. In particular, some stakeholders said they had not been included in discussions about which felony convictions should disqualify a worker from receiving a card, even though they had expected and requested that DHS and TSA involve them in these decisions. One port security director said TSA promised the port a "large role" in determining the eligibility requirements which has not materialized, and others said that in the absence of TSA defining the eligibility requirements for the card, they recently drafted and sent proposed eligibility requirements to TSA. TSA officials said they have an extensive outreach program to inform external stakeholders about the program, for instance, by frequently attending industry conferences and maritime association meetings. Obtaining stakeholder involvement is important because achieving program goals hinges on the federal government's ability to form effective partnerships among many public and private stakeholders. If such partnerships are not in place--and equally important, if they do not work effectively--TSA may not be able to test and deliver a program that performs as expected. For example, TSA currently relies on facilities and workers to voluntarily participate in tests of the prototype card system. Without this and other support provided by stakeholders, the prototype card system could not be tested as planned. Planning for stakeholder involvement is also important because in the future other groups or organizations, for instance, other federal agencies or states, may be charged with developing biometric identification card programs and emerge as important external stakeholders for the maritime worker identification card program. According to best practices, in order to ensure that the appropriate data are collected to support analyses on which program decisions are made, managers should develop a plan that describes data to be collected, the source of these data, and how the data will be analyzed. During the test of the prototype card system, officials said they are to collect data on the feasibility of the federal and decentralized approaches in order to conduct an alternatives analysis--a comparison of the three possible approaches that demonstrates one approach is more cost-effective than the others. TSA officials acknowledge they have not yet completed a plan; however, they said they intend to do so with contractor support. On the basis of interviews with a number of officials and review of documents, we determined TSA has not identified who would be responsible for collecting the data; the sources for the data, and how it will be analyzed. These details are needed to ensure production of a good result. Completing the cost-benefit and alternatives analyses is important because not only do OMB regulations and DHS guidance instruct agencies to complete them, but DHS officials said the alternatives analysis would guide their decision regarding which approach is the most cost-effective way to provide the card. Without a plan to guide this activity, TSA may not perform the necessary analysis to inform sound decision making, possibly causing further delays. With the passage of MTSA, Congress established a framework for homeland security that relies on a multilayered defense strategy to enhance port security. Improving access control by providing ports a maritime worker identification card is an important part of this strategy. Each delay in TSA's program to develop the card postpones enhancements to port security and complicates port stakeholders' efforts to make wise investment decisions regarding security infrastructure. Despite delays and the difficulties of a major governmentwide reorganization, DHS and TSA have made some progress in developing a maritime worker identification card. Nevertheless, without developing a comprehensive project plan and its component parts--an established industry best practice for project planning and management--TSA is placing the program's schedule and performance at higher risk. More delays could occur, for example, unless DHS and TSA agree on a comprehensive project plan to guide the remainder of the project, identify work that TSA and DHS officials must complete, and set deadlines for completing it. Without adequate risk mitigation plans, TSA may not be able to resolve problems that could adversely affect the card program objectives, such as insufficient stakeholder support to successfully develop, test, and implement the card program. Further, without a plan to guide the cost-benefit and alternatives analyses, TSA increases the risk that it may fail to sufficiently analyze the feasibility of various approaches to issue the card, an analysis needed by DHS policy officials to make informed decisions about the program, putting the program at risk for further delays. To help ensure that TSA meets the challenges it is facing in developing and operating its maritime worker identification card program, we are recommending that the Secretary of Homeland Security direct the TSA Administrator to employ industry best practices for project planning and management, by taking the following two actions: Develop a comprehensive project plan for managing the remaining life of the project. Develop specific, detailed plans for risk mitigation and cost-benefit and alternatives analyses. We provided a draft of this report to DHS and TSA for their review and comment. DHS and TSA generally concurred with the findings and recommendations that we made in our report and provided technical comments that we incorporated where appropriate. DHS and TSA also provided written comments on a draft of this report (see app. I). In its comments, DHS noted actions that it has recently taken or plans to take to address concerns we raised regarding outstanding regulatory and policy issues. Although DHS and TSA concurred with our recommendations, in their comments, they contend that project plans and program management controls are currently in place to manage their test of the TWIC prototype. However, at the time of our review, the project planning documents identified by DHS and TSA in their comments were incomplete, lacked the necessary approvals from appropriate officials, or were not provided during our audit. Furthermore, project plans and other management controls have not been developed for the remaining life of the project. We are sending copies of this report to other interested Members of Congress. We are also sending copies to the Secretary of Homeland Security. We will 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. If you or your staffs have any questions about this report, please contact me at (415) 904-2200 or at [email protected]. Other major contributors to this report included Jonathan Bachman, Chuck Bausell, Tom Beall, Steve Calvo, Ellen Chu, Matt Coco, Lester Diamond, Geoffrey Hamilton, Rich Hung, Lori Kmetz, Anne Laffoon, Jeff Larson, David Powner, Tomas Ramirez, and Stan Stenerson.

As part of a multilayered effort to strengthen port security, the Maritime Transportation Security Act (MTSA) of 2002 calls for the Department of Homeland Security (DHS) to issue a worker identification card that uses biological metrics, such as fingerprints, to control access to secure areas of ports or ships. Charged with the responsibility for developing this card, the Transportation Security Administration (TSA), within DHS, initially planned to issue a Transportation Worker Identification Credential in August 2004 to about 6 million maritime workers. GAO assessed what factors limited TSA's ability to meet its August 2004 target date for issuing cards and what challenges remain for TSA to implement the card. Three main factors, all of which resulted in delays for testing a prototype of the maritime worker identification card system, caused the agency to miss its initial August 2004 target date for issuing the cards: (1) officials had difficulty obtaining timely approval to proceed with the prototype test from DHS, (2) extra time was required to identify data to be collected for a cost-benefit analysis, and (3) additional work to assess card technologies was required. DHS has not determined when it may begin issuing cards. In the future, TSA will face difficult challenges as it moves forward with developing and operating the card program, for example, developing regulations that identify eligibility requirements for the card. An additional challenge--and one that holds potential to adversely affect the entire program--is that TSA does not yet have a comprehensive plan in place for managing the project. Failure to develop such a plan places the card program at higher risk of cost overruns, missed deadlines, and underperformance. Following established, industry best practices for project planning and management could help TSA address these challenges. Best practices suggest managers develop a comprehensive project plan and other, detailed component plans. However, while TSA has initiated some project planning, the agency lacks an approved comprehensive project plan to govern the life of the project and has not yet developed other, detailed component plans for risk mitigation or the cost-benefit and alternatives analyses.

Each year, CMS evaluates approximately 3,000 acute care hospitals participating in HVBP on their performance in prior years on a series of quality and efficiency measures. Prior to the HVBP program, hospitals received slightly higher Medicare payments for submitting data on measures within CMS's public Inpatient Quality Reporting (IQR). Beginning in fiscal year 2013, the HVBP program provided new bonuses and penalties that were based on each hospital's performance on a subset of these measures. Each individual hospital's performance is calculated for each measure within a domain using a baseline period and a performance period, both of which are in prior years. For each of the HVBP measures, CMS considers both the results of a hospital's absolute performance-- awarding achievement points if performance on a measure was at or above the median for all participating hospitals--and improvements in its performance over time--awarding improvement points if current performance had improved. CMS uses the higher of these points as the hospital's score on each measure. Related measures are grouped into specific performance categories, called domains. The domain scores are weighted to develop a total performance score for each hospital. The measures that constitute each domain, the number of domains, and the weighting of the domain scores have changed over the years of the program (see table 1). In fiscal year 2013, HVBP had two quality domains--clinical processes and patient experience; by 2017, two additional quality domains--patient outcomes and safety--and one efficiency domain were added to the program. By law, the HVBP program is budget neutral, which means that the total amount of payment increases, or bonuses, awarded to hospitals deemed to provide higher quality of care must equal the total amount of payment reductions, or penalties, applied to hospitals deemed to provide lower quality of care. To fund the HVBP program, CMS first applies an initial fixed percentage reduction to the amount of each hospital's Medicare reimbursements for its patients that fiscal year. The initial percentage reduction was 1 percent in fiscal year 2013 and has grown by 0.25 percent each year to the maximum of 2 percent for fiscal year 2017 and beyond, as specified in PPACA. CMS determines each hospital's payment adjustment based on the hospital's total performance score relative to all participating hospitals. Hospitals with payment adjustments that exceed the initial reduction receive a net increase, or bonus. Hospitals with a payment adjustment less than the initial reduction have a net decrease, or a penalty. (For two hypothetical examples using the initial percentage reduction for fiscal year 2017, see fig. 1.) These payment adjustments are applied to the inpatient Medicare payment for each discharged patient throughout the upcoming fiscal year. In October 2015, we reported on certain HVBP performance measures prior to and after the implementation of the HVBP program. We found that trends in performance for many of these measures were unchanged since the implementation of the HVBP program. This report included information from interviews with officials from selected hospitals who noted that the HVBP program reinforced ongoing quality improvement efforts but did not lead to major changes in focus. Hospital officials also indicated that there were patient population and community barriers to their quality improvement efforts. In a related report on the HVBP program, HHS noted challenges that rural hospitals face that affect their performance on quality measures and the reliability of their outcome measurements, including lower occupancy rates, higher percentages of uncompensated care, and lower operating margins than urban hospitals. Safety net hospitals generally had lower median quality domain scores in comparison to all hospitals, while small rural and small urban hospitals generally scored higher on quality and efficiency domains during fiscal years 2013 through 2017. Median scores for each of the separate quality domains--clinical processes, patient experience, patient outcomes, and safety--were consistently lower for safety net hospitals and were generally higher for small rural and small urban hospitals than for hospitals overall during fiscal years 2013 through 2017. Specifically, for the four quality domains, we found the following: Clinical processes: The clinical processes median domain scores-- which summarize measures for preventive or routine care--were lower for safety net hospitals and generally higher for small urban hospitals than for all hospitals during fiscal years 2013 through 2017. Median clinical processes scores for small rural hospitals were generally lower--between 4 and 9 percent--than for hospitals overall in fiscal years 2013 through 2015 (see fig. 2). Patient experience: Small hospitals consistently had higher patient experience scores--which consist of measures for communication and responsiveness--than hospitals overall, while safety net hospitals had the lowest scores of any of the hospital types (see fig. 3). Patient outcomes: Median scores for the patient outcomes domain-- which comprises measures for mortality rates and other results and was added in fiscal year 2014--were generally lowest for small rural hospitals in each year of our analysis, except for fiscal year 2016, when compared to hospitals overall (see fig. 4). Safety net hospitals and small urban hospitals--with the exception of fiscal year 2016-- also did not perform as well as all hospitals in the years of our analysis. Safety: Safety scores--which were added in fiscal year 2017 and include measures for infection rates and other complications--were lowest for safety net hospitals and higher for small rural and small urban hospitals than the median scores for hospitals overall. The median score for the safety net hospitals was about 11 percent lower than the median score for all hospitals. Small rural hospitals had the highest median score and small urban hospitals also had a higher median score than hospitals overall. However, 21 percent of all hospitals were missing scores for this new domain in fiscal year 2017. Trends for the efficiency domain, which contains the single cost measure--Medicare spending per beneficiary--were similar to the quality domains in that small hospitals tended to perform better than safety net hospitals and better than hospitals overall from fiscal year 2015, when the domain was added, through fiscal year 2017 (see fig. 5). Safety net hospitals have had the same median efficiency scores as for hospitals overall during the 3 years it has been included in the program. However, over 40 percent of all hospitals had an efficiency score of 0 during these years due to CMS's methodology for calculating scores. This methodology resulted in a low median score of 10 for all hospitals, though many hospitals had considerably higher efficiency scores. Hospitals' total performance scores were consistent with the trends in the quality and efficiency domain scores. Specifically, when compared to all hospitals, total performance scores were lowest for safety net hospitals and generally highest for small urban hospitals during fiscal years 2013 through 2017 (see fig. 6). Median payment adjustments generally have varied for all hospitals, and small rural and small urban hospitals, since the program began; however, in most years, the median payment adjustment for safety net hospitals has been a penalty--that is, a negative payment adjustment. In contrast, the small hospitals, as well as hospitals overall, generally had positive payment adjustments, indicating a bonus, with the exception of fiscal year 2014. Small urban hospitals consistently received higher payment adjustments than all hospitals--between 0.03 and 0.36 percentage points higher--every fiscal year. (See table 2.) The majority of all hospitals received a bonus or a penalty of less than 0.5 percent each year of the program (see fig. 7). However, over time, an increasing percentage of hospitals received bonuses of more than 0.5 percent, and by fiscal year 2016, more than one-quarter of all participating hospitals received a bonus of more than 0.5 percent. Compared to all hospitals, a higher percentage of small rural and small urban hospitals received bonuses of more than 0.5 percent, and this disparity has grown as the program continues. An increasing percentage of hospitals have also received penalties of greater than 0.5 percent over time, and safety net hospitals consistently had the highest percentage of penalties of 0.5 percent or more when compared to all hospitals, small rural hospitals, and small urban hospitals. In part, the size of the bonuses and penalties, in dollar terms, has been increasing due to the increase in the initial reduction from 1 percent in fiscal year 2013 to 2 percent in fiscal year 2017 (see table 3). In addition, as more hospitals receive bonuses in excess of 0.5 percent, the difference between the bonuses and penalties has been increasing. For example, in fiscal year 2013, the median bonus and penalty for all hospitals was nearly identical. Over the years, the median bonus has more than doubled, but the median penalty has nearly tripled. For most hospitals, the annual bonus or penalty is less than $100,000, and by the end of the fiscal year 2017, over $690 million will have been redistributed from hospitals that received penalties to hospitals that received bonuses. Safety net hospitals received a smaller percentage of the bonuses and paid a greater share of the penalties than small rural and small urban hospitals. For example, safety net hospitals have received about 5 percent of the bonus dollars and paid approximately 10 percent of the penalty dollars each year. In contrast, small rural and urban hospitals have received an average of about 9 and 12 percent of the bonus dollars, respectively, and both groups of these small hospitals paid about 5 percent or less of the penalties dollars during fiscal years 2013 through 2017. Since the efficiency score was added to the HVBP program in fiscal year 2015, about 20 percent of the hospitals that received bonuses each year had weighted composite quality scores below the median for all hospitals in fiscal years 2015 through 2017 (see table 4). For each fiscal year, a higher percentage of safety net and small rural hospitals received bonuses (between 26 and 36 percent) when compared to all hospitals, despite having quality scores below the median score for all hospitals. The median payment adjustments for the hospitals that received a bonus with lower quality scores were less than median bonuses overall. For example, in fiscal year 2015, the median bonus for all hospitals was 0.32 percent, and the median bonus for the hospitals that received a bonus with composite quality scores below the median was 0.17 percent. Hospitals that received a bonus despite having composite quality scores below the median for all hospitals had sufficiently high efficiency scores to achieve total performance scores that made them eligible for bonuses. Across all hospital types and years, the median efficiency scores for these hospitals ranged from 1.50 and 6.00 times higher than the median efficiency scores for hospitals overall. For example, in fiscal year 2017, the overall median efficiency score for small rural hospitals was 30.00. In contrast, the median efficiency score for small rural hospitals that received a bonus with a composite quality score below the all-hospital median was more than twice as high at 70.00. Table 5 compares two actual hospitals--both of which received a bonus--with similar total performance scores but different composite quality scores. Hospital A outperformed Hospital B in every quality domain except safety and received a composite quality score of 40.00, well above the median of 29.03. While both hospitals had an efficiency score above the median of 10.00, Hospital B's high efficiency score results in a total performance score above that of the higher quality Hospital A. According to CMS documentation, the agency developed the weighting formula to ensure that the Medicare spending per beneficiary measure-- the sole measure in the efficiency domain--would make up only a portion of the total performance score and that the remainder would be based on hospitals' performance on the other measures. The same documentation stated that the distinct measure of cost, independent of quality, would enable the agency to identify--and subsequently reward through payment adjustments--hospitals involved in the provision of high- quality care at a lower cost to Medicare. However, CMS's formula for weighting the domain scores to determine a total performance score has created a system that, in some cases, rewards lower quality hospitals that provide care at a lower cost. In a November 2016 report to Congress, CMS indicated that it was aware of reports that the added efficiency metric resulted in some lower quality hospitals receiving bonus HVBP payments in 2015. However, in the report CMS reiterated that its scoring methodology--the weighting of quality domains at 75 percent and the efficiency domain at 25--provided balanced consideration for quality and efficiency and would ensure that high-quality hospitals were being rewarded. Our work shows that CMS has not achieved this balanced consideration as it intended, thereby rewarding some lower quality hospitals due to their high efficiency scores. CMS did not require a complete set of domain scores to participate in the HVBP program after 2015, but instead proportionately redistributed the missing scores' domain weights to the other domains, including efficiency. As a result, the efficiency score can carry even more than its assigned weight, and hospitals with missing domain scores had efficiency scores that were weighted higher than those of the other participating hospitals. This amplified the contribution of the efficiency domain to hospitals' total performance scores. The assigned weight for the efficiency score was 20 percent in fiscal year 2015 and 25 percent in fiscal years 2016 and 2017. However, due to the proportional redistribution, a hospital's efficiency score could be weighted between 25 and 50 percent--rather than the original 20 percent--in fiscal year 2015 and between 26 and 71 percent--rather than the original 25 percent--in fiscal years 2016 and 2017, depending on how many and which domains were missing. Table 6 illustrates the impact of redistributed domain weights on hospitals in fiscal year 2017. Hospital A, the same hospital noted in table 5, is considered a higher quality hospital, with a composite quality score well above the median of 29.03 for all hospitals in 2017. Three other actual hospitals--hospitals C through E--show how the proportional redistribution of weights can dramatically increase the effect that a hospital's efficiency score can have on its total performance score. Hospital C is missing two domains, together worth 45 percent of the total performance score. The 45 percent is then proportionally redistributed to the other domains so that the clinical processes domain weight increases from 5.00 percent to 9.10 percent and the weights of the patient experience and efficiency domains each increase from 25 percent to 45.45 percent. We also found that hospitals with missing domain scores were more likely to receive a bonus than hospitals with all domain scores. Specifically, in fiscal year 2017, 68 percent of hospitals with missing domain scores received a bonus, compared to 50 percent of hospitals with all domain scores. Of the approximately 20 percent of hospitals that received a bonus with a quality score below the median described earlier, many were also missing domain scores. For example, in fiscal year 2017, 182 of the 345 lower quality hospitals that received a bonus (53 percent) were missing at least one quality domain score. Hospitals with missing domain scores had bonuses that grew to exceed the median bonus payment adjustment for all hospitals. In fiscal 2015, the median bonus adjustment for all hospitals was 0.32 percent. For lower quality hospitals with missing domain scores, the median bonus adjustment that year was slightly lower at 0.31 percent. However, by fiscal year 2017, lower quality hospitals with missing domain scores that received bonuses had a bonus adjustment of 0.74 percent, considerably higher than the median bonus adjustment of 0.54 percent for hospitals overall. CMS decided to proportionally redistribute missing domain scores in order to maintain the relative weights of each remaining domain and reliably score hospitals on their performance. However, the issues we identified with the weighting formula--in that it results in some lower quality hospitals receiving bonuses--are exacerbated for hospitals with missing domain scores. As a result, hospitals with missing domain scores are more likely to get a bonus, and, in some cases, those bonuses are greater than median bonuses overall. Additionally, while CMS intended to keep the efficiency metric independent of quality, the effective weight of the efficiency measure depends on the extent to which hospitals report quality measures. As a result, the balance the agency tried to achieve in the total performance score--allocating 75 percent of the score to the quality domains and 25 percent of the score to the efficiency domain--is no longer achieved. The aim of the HVBP program is to improve hospital quality and efficiency by providing incentives for hospitals to improve their quality of care and to become more cost efficient. Throughout the 5 years of the program, CMS has made modifications to meet these goals by changing quality performance domains and domain weighting from year to year. With the addition of the efficiency domain in fiscal year 2015, CMS signaled the importance of hospitals' providing care at a lower cost to Medicare, and, in its weighting formula, the agency tried to find balanced consideration for quality and cost. Rather than achieving this balance--which would have allowed the agency to identify and reward higher quality and lower cost hospitals--CMS's weighting formula has resulted in bonuses for some lower quality hospitals, solely due to their cost efficiency. Because the program is budget neutral, bonuses for lower quality hospitals may result in smaller bonuses for hospitals that are performing well across all domains. The issue is especially stark for between 10 and 25 percent of the hospitals that were missing domain scores in fiscal years 2015 through 2017, which has also contributed to the awarding of bonuses to lower quality hospitals. If CMS continues to use the current formula, it will continue to reward hospitals that do not score well on quality and efficiency metrics. To ensure that the HVBP program accomplishes its goal to balance quality and efficiency and to ensure that it minimizes the payment of bonuses to hospitals with lower quality scores, we recommend that the Administrator of CMS take the following two actions: Revise the formula for the calculation of hospitals' total performance score or take other actions so that the efficiency score does not have a disproportionate effect on the total performance score. Revise the practice of proportional redistribution used to correct for missing domain scores so that it no longer facilitates the awarding of bonuses to hospitals with lower quality scores. We provided a draft of this report to HHS for comment, and its written comments are reprinted in appendix III. The department indicated that it would examine the formula used for calculating hospitals' total performance scores and would explore alternatives to the practice of proportional redistribution. While HHS stated it would consider revisions to these practices, it indicated that any changes to the weights of the domains, or the distribution of weights for missing domains, would be evaluated for potential negative impacts and would be subject to notice and comment rulemaking. HHS also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Health and Human Services, the CMS Administrator, 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 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. Table 7 lists the Inpatient Quality Reporting program measures that the Centers for Medicare & Medicaid Services (CMS) used to analyze hospitals' performance in the Hospital Value-based Purchasing program during fiscal years 2013 through 2017. This table identifies the domain associated with each measure, which measures were used to calculate domain scores each year, the measure code, and a description of each measure. In addition to the contact named above, Martin T. Gahart (Assistant Director), Erin C. Henderson (Analyst-in-Charge), Zhi Boon, Kye Briesath, and Elizabeth Morrison made key contributions to this report. Also contributing were Muriel Brown and Jacquelyn Hamilton. Medicare Value-based Payment Models: Participation Challenges and Available Assistance for Small and Rural Practices. GAO-17-55. Washington, D.C.: December 9, 2016. Health Care Quality: HHS Should Set Priorities and Comprehensively Plan Its Efforts to Better Align Health Quality Measures. GAO-17-5. Washington, D.C.: October 13, 2016. Patient Safety: Hospitals Face Challenges Implementing Evidence-based Practices. GAO-16-308. Washington, D.C.: February 25, 2016. Hospital Value-based Purchasing: Initial Results Show Modest Effects on Medicare Payments and No Apparent Change in Quality-of-Care Trends. GAO-16-9. Washington, D.C.: October 1, 2015. Health Care Transparency: Actions Needed to Improve Cost and Quality Information for Consumers. GAO-15-11. Washington, D.C.: October 20, 2014. Electronic Health Record Programs: Participation Has Increased, but Action Needed to Achieve Goals, Including Improved Quality of Care. GAO-14-207. Washington, D.C.: March 6, 2014. Health Care Quality Measurement: HHS Should Address Contractor Performance and Plan for Needed Measures. GAO-12-136. Washington, D.C.: January 13, 2012. Hospital Quality Data: Issues and Challenges Related to How Hospitals Submit Data and How CMS Ensures Data Reliability. GAO-08-555T. Washington, D.C.: March 6, 2008.

The HVBP program, enacted as part of the Patient Protection and Affordable Care Act (PPACA), evaluates hospital performance on quality and efficiency (Medicare spending per beneficiary) measures. Based on those results, CMS adjusts Medicare payments, leading to bonuses or penalties for hospitals. The first HVBP payment adjustments started in fiscal year 2013. PPACA included a provision for GAO to assess the HVBP program's impact on Medicare quality and efficiency, including the effects on safety net, small rural, and small urban hospitals. This report addresses (1) hospitals' performance in quality and efficiency categories; (2) how hospitals' payment adjustments have changed over time; and (3) the effect, if any, of efficiency scores on payment adjustments. GAO analyzed CMS documentation and data on performance scores and payment adjustments in each year for all hospitals participating in fiscal years 2013 through 2017. GAO also analyzed results for safety net, small rural, and small urban hospitals and interviewed CMS officials. The Hospital Value-based Purchasing (HVBP) program aims to improve quality of care and efficiency by creating financial incentives for about 3,000 participating hospitals. From fiscal years 2013 through 2017, performance on quality and efficiency measures varied by hospital type. Safety net hospitals--those that serve a high proportion of low-income patients--generally scored lower in quality compared to all participating hospitals. In contrast, small rural and small urban hospitals--those with 100 or fewer acute care beds--scored higher on efficiency compared to all hospitals. Payment adjustments--bonuses or penalties, announced prior to each fiscal year--have varied over time for all hospitals. In four out of the five years of GAO's analysis, small rural and small urban hospitals were more likely to receive a bonus compared to all participating hospitals, while safety net hospitals were more likely to receive a penalty. While a majority of all hospitals received a bonus or a penalty of less than 0.5 percent each year, the percentage of hospitals receiving a bonus greater than 0.5 percent increased from 4 percent to 29 percent from fiscal year 2013 to 2017. In dollar terms, most hospitals had a bonus or penalty of less than $100,000 in fiscal year 2017. Some hospitals with high efficiency scores received bonuses, despite having relatively low quality scores, which contradicts the Centers for Medicare & Medicaid Service's (CMS) stated intention to reward hospitals providing high-quality care at a lower cost. Further, among hospitals that were missing one or more quality scores, the efficiency score had a greater effect on the total performance score because of the methodology used by CMS. This methodology compensated for the missing scores by increasing the weights of all of the non-missing scores. Consequently, hospitals with missing scores were more likely to receive bonuses than hospitals with complete scores. Bonus or Penalty Status of Hospitals Participating in the Hospital Value-based Purchasing Program, Fiscal Years 2015 through 2017 So that lower quality hospitals do not receive bonuses, GAO recommends that CMS revise (1) the methodology used to calculate total performance scores and (2) its method of accounting for missing quality scores. In its written comments, HHS indicated that it would consider revising these two methodologies.

"Every telecommunication user suffers from telabuse. The only question is how much each loses each month." "There are two kinds of customers: those who have been victims of toll fraud, and those who will be." The abuse and theft of telecommunications services is one of the fastest growing crimes in the United States. According to Telecommunications Advisors, Incorporated (TAI), a consulting firm that has done extensive research on telephone fraud and abuse problems, these crimes cost industry and government an estimated $9 billion each year. Telephone abuse or "telabuse" is the misuse or waste of telephone resources by employees from within an organization or by their relatives or acquaintances. This typically involves personal long-distance calls made by employees at an organization's expense. Toll fraud is the theft of an organization's long-distance services by individuals from the outside. This can involve fraud committed by experienced telephone hackers who are able to penetrate an organization's voice message systems and private networks. It also involves the fraudulent use of telephone company calling cards and cellular telephones by hackers or others who steal calling card numbers and cellular telephone services. A security manager for one major telephone company attributed a large part of the ever-increasing levels of toll fraud and telabuse to user neglect and inattention. According to the security manager, the attention and consideration industry and government organizations give to telephone equipment and services often stop after the initial purchase, leaving them more vulnerable to the risk of telephone abuse and fraud. Furthermore, it is commonplace, in industry and government, that bills for telecommunications services are often not reviewed to ensure that charges incurred are appropriate and justified. For most organizations, controls over telephone services, as expected, are secondary to many of the more pressing daily business functions. According to TAI, organizations often treat their telephone bills like other bills, such as rent and electric, and simply pay them without examination. Cases reported by TAI have also shown that failure to establish adequate controls over the use of telecommunications resources can have costly consequences. For example, one toll fraud incident at the Drug Enforcement Administration (DEA) reportedly cost the government over $2 million because DEA, which did not monitor telephone activity and review billing records, did not detect fraudulent calls by telephone hackers for 18 months. In another case, not adequately monitoring telephone calling activity at New York City's Human Resources Administration offices cost the city over $200,000 for thousands of employee calls to party lines and other personal services over several years. These problems are not confined to government. For example, a private company in Texas was billed $25,000 in 1 month for improper calls and, by instituting minor controls over employee use of telephones, a major utility company in the southeast was able to reduce its telephone bill by over $60,000 per year. USDA and its 29 component agencies spend over $100 million on telecommunications annually, including more than $50 million for commercial telecommunications services obtained from over 1,500 telephone companies. These companies provide local telephone service as well as international and domestic long-distance services that are not available on the FTS 2000 network. USDA headquarters offices and other USDA agency and staff offices within the Washington, D.C., metropolitan area pay for over 24,000 separate telephone lines each month. The Federal Information Resources Management Regulation governs use of telecommunications services for all government agencies and states that telephone calls paid for by the government shall be used to conduct official business only. Unauthorized calls, which are calls that are not necessary in the interest of the government, are prohibited, and agencies are required to collect for any unauthorized calls if it is cost-effective to do so. USDA's telecommunications policy (DR-3300-1) requires that USDA agencies ensure that government-provided telephones are used only for official business and for calls the agency considers necessary. Under DR-3300-1, the Office of Information Resources Management (OIRM) is responsible for establishing policy and procedures for the management and cost control of telecommunication systems and each component agency and staff office is responsible for ensuring compliance with departmental policy and that government telephones are used for authorized purposes only in accordance with this policy. USDA's Chief Financial Officer (CFO) is responsible for overseeing all financial management activities relating to the programs and operations of the Department, including managing USDA's National Finance Center (NFC). To assess USDA's controls over telephone use, we examined USDA's policies and procedures governing the use of government telephones. We also obtained and reviewed commercial telephone billing records for USDA agency offices in the Washington, D.C., metropolitan area for 4 months in fiscal year 1995, which totaled about $580,000 or 1 percent of the $50 million USDA spends annually for commercial telecommunications costs. The 4 months were selected from early, mid, and late parts of the fiscal year to adjust for any seasonal variations in calling patterns, and we reviewed billing records of all collect calls accepted by the Department during the 4 months as well as selected long-distance calls made during the month of August 1995. In cases where billing records disclosed instances of telephone abuse, we discussed these cases with USDA officials and telephone company representatives and provided billing records of the calls to USDA officials for appropriate action. We also discussed cases involving collect calls from prisons with correctional facility personnel and USDA officials. In addition, we reviewed telephone company records and USDA documentation pertaining to a March 1995 hacker case at the Department and examined USDA actions taken in response to this attack. Appendix I provides further details on our scope and methodology. We conducted our review from October 1995 through February 1996 in accordance with generally accepted government auditing standards. We discussed the facts in our report with USDA officials, including the Assistant Secretary and the Deputy Assistant Secretary for Administration, the acting Chief Financial Officer, the Director of USDA's Office of Information Resources Management, and the Assistant Inspector General for Investigations and have incorporated their comments where appropriate. We also provided a draft of the report to USDA for comment. USDA's comments are discussed in the report and are included in full in appendix II. Our review of four monthly telephone bills for USDA agencies and offices in the Washington, D.C., metropolitan area found that 652 collect calls, or about 50 percent of all collect calls accepted and paid for by USDA during this 4-month period, were from individuals at 18 correctional institutions. In these cases, USDA paid about $2,600 for collect calls accepted from correctional centers in addition to unknown charges for subsequent calls placed by USDA on behalf of individuals at these centers. Because these subsequent calls cannot be easily differentiated from other calls on telephone bills, it is difficult to determine the extent to which this occurred and the total charges that resulted from all collect calls. Additionally, our review of just a few calls from the thousands of long-distance calls made by USDA agencies and offices in the Washington, D.C., metropolitan area each month found several other cases of telephone abuse involving personal long-distance calls outside the country to adult entertainment services and companies advertising jobs. USDA has been aware of cases of collect calling abuse since at least 1994, but has not taken adequate action to stop it. Although USDA policy does not specifically address collect calls placed from a nongovernment number to a government number, it states that USDA should ensure that government telephones are used only for authorized purposes. However, as discussed later in this report, USDA generally does not review its telephone bills to make such determinations. Individuals in at least 20 different USDA agencies or offices in the Washington, D.C., metropolitan area have accepted, at USDA's expense, collect calls from individuals at federal, state, and county correctional institutions. This problem is exacerbated because individuals who accept these collect calls can use USDA telephones to place long-distance calls for the callers and transfer them to these calls. However, it is difficult to determine to what extent this has occurred or the total cost involved because charges for these additional calls cannot be easily identified. According to telephone company representatives, charges for these long-distance calls may appear on any one of many separate carriers' bills and, because the termination point of the call is unknown, it is difficult to identify these calls on bills. As discussed later, cases of telephone abuse in 1994 investigated by the Office of the Inspector General (OIG) found that collect calls from inmates at correctional centers were transferred to other calls. Table 1 shows the number of collect calls made from correctional centers to USDA agencies and offices located in the Washington, D.C., metropolitan area. However, this may not represent all the collect calls made to USDA from correctional centers during this 4-month period because USDA could not provide us with complete billing records for these periods. An inmate uses a telephone in a correctional facility to place a collect call to a government agency or private company office telephone number. Upon answering the telephone, an individual at that agency or office hears a recorded message giving the inmate's name and the name of the correctional facility. The individual is then asked whether he/she will accept the charge for the collect call. An individual, who is cooperating with the inmate, will accept the unauthorized call. In many cases, after accepting the call, the cooperating individual will in turn make other long-distance calls for the inmate, which are also charged to the agency or office. The facility operations manager stated that he is often contacted by individuals, government agencies, and private companies, who detect abuse on their telephones and arrange to have certain telephone numbers blocked. Blocking the numbers prevents inmates from placing calls to these telephones. The operations manager added that, with large organizations such as USDA, this may not be a viable solution to the problem because there are often many different agency telephones involved. Although the operations manager told us he has never been contacted by USDA about any inmate collect calls, he stated that at least four other federal agencies over the past 6 years have contacted him about this problem. According to the operations manager, agencies have had success stopping some abuse by blocking agency telephone numbers and taking punitive action against employees responsible for this abuse. While we were able to identify the cost of the collect calls (as shown in the table), charges for calls that are transferred were not identified. However, because many of these collect calls could have been transferred to long-distance lines, thousands more could have been added to USDA's telephone bills. In the past, USDA identified abuses involving collect calls from inmates similar to the cases we found. However, the Department did not take adequate action to stop the problem. According to USDA documentation, in August 1994, an OIRM telecommunications specialist uncovered cases of telabuse at the Department dating back to 1993, which involved collect calls from inmates at the Federal Corrections Center in Lorton, Virginia. This individual found these cases while examining monthly telephone charges on commercial carrier telephone bills. He told us he had made a special request for the billing records to review telephone charges for a contractor working on-site at USDA headquarters offices. Generally, as we discuss later in this report, USDA officials do not review commercial carrier telephone bills. OIRM referred the matter to the Department's OIG in August 1994. The OIG conducted a preliminary inquiry and determined from billing records prior to December 1994 that employees working in several USDA agency offices in the Washington, D.C., metropolitan area were improperly accepting collect calls placed from six correctional institutions. These institutions are located in Lorton and Oakwood, Virginia; Waldorf and La Plata, Maryland; and New Bern and Bayboro, North Carolina. The OIG also found that, after accepting collect calls from inmates, USDA employees made other unauthorized long-distance calls for the inmates and transferred the inmates to those calls. Costs for these calls were also charged to the Department. According to the OIG, it determined that individuals in multiple USDA agencies and offices had accepted more than $4,500 in collect calls from inmates. In one case, the OIG identified a contractor employee who had been accepting collect calls from a correctional facility while working in the OIG's Washington, D.C., office. This individual, who had left USDA at the time of the inquiry, reimbursed the Department $177 for these unauthorized collect calls. The OIG referred all the remaining open cases to OIRM for action. Specifically, in a May 1995 letter to the Director of the OIRM's Washington Service Center, the Deputy Assistant Inspector General for Investigations turned these cases over to OIRM for "handling and further distribution, as this type of misconduct matter is appropriately handled by the personnel investigators within each of the affected agencies." However, the Director could not explain why no further action on these specific cases was taken. The OIG also tried to have some of the collect calls it identified from Lorton blocked, but USDA records indicate that collect calls continued because the carrier did not keep these blocks in place. As a result, the carrier agreed to reimburse USDA for collect calls from Lorton identified during the period investigated by the OIG. USDA received credit for some collect calls from Lorton. However, at the time of our review, USDA had not followed up to determine whether the Department received reimbursement for all the collect calls from Lorton because no one had reviewed the bills to match records of the calls with the credits being given. Moreover, OIRM took no action to determine whether there were other collect calling abuses at the Department. Consequently, as shown by our review, collect calls from correctional centers to the Department have persisted. In fact, our review found at least seven cases where the same office telephones identified by the OIG in 1994 were still being used to accept collect calls. In reviewing USDA's Washington, D.C., telephone bills, we noted that agencies and offices spend over $30,000 per month for long-distance calls. We selected a few records from August 1995 bills for detailed examination of long-distance calls and identified several cases where unauthorized calls were made to the Dominican Republic. Some of these calls involved connections to adult entertainment lines, such as sex and party lines, and to companies advertising jobs. In one case, for example, USDA paid over $33 for four calls made from one office to a party line "chat" service in the Dominican Republic. In another case, the Department also paid for international calls made from several agency offices to job advertisement lines where home-based business and other employment opportunities are discussed. In addition, we found one case where a sex entertainment line in the Dominican Republic was called at USDA's expense. In large part, these problems exist at USDA because bills for the tens of millions of dollars in commercial telephone services paid annually by USDA are generally not reviewed to monitor calling activity. USDA pays over 23,000 bills each month for commercial telephone services obtained from over 1,500 private vendors across the country. This includes the bills from telephone companies that provide commercial telephone and long-distance services to USDA offices in the Washington, D.C., metropolitan area. Vendors send these bills directly to USDA's NFC in New Orleans, Louisiana, where they are processed and paid. USDA policy requires agencies and staff offices to ensure that government telephones are used for authorized purposes only. Specifically, the policy states that the use of government telephones shall be limited to the conduct of official business and other authorized uses, which can also include such things as making a brief daily telephone call to a spouse and children within a local commuting area. However, as we recently reported, agency managers rarely review telephone bills. Consequently, agency managers lack the information they need to determine whether telephones and long-distance services are used properly in accordance with departmental policy. In our prior reports, we also found that USDA wasted tens of thousands of dollars because it had not established adequate procedures for reviewing bills to verify the appropriateness of telephone charges by private vendors. To help ensure that controls are appropriate and cost-effective, agencies need to consider the extent and cost of controls relative to the importance and risk associated with a given program. Because USDA rarely reviews its telephone bills, we reported in September 1995 that the Department had paid tens of thousands of dollars each year to lease telephone equipment, such as rotary telephones and outdated modems that were either no longer used or could not be located. In addition, USDA wasted thousands more paying for telephone services for field offices that had been closed more than a year. USDA has begun to take positive steps in response to our previous reports to improve controls over payments for commercial telephone services. Specifically, USDA stopped payments for leased telecommunications equipment it no longer uses and is seeking reimbursement from carriers for overcharges. In addition, in October 1995, USDA formed a task force to investigate and develop action plans to correct telecommunications management deficiencies at the Department. In December 1995, the task force agreed with GAO's findings and reported that "the process of planning, acquiring, ordering, billing, invoicing, inventory control, payments, and management of telecommunications services and equipment is chaotic at best and totally out of control at the very least." Therefore, the task force recommended that USDA's current paper-based billing system be reengineered and subsequently automated so that billing data can be cost-effectively verified. On March 1, 1996, USDA's acting Chief Financial Officer told us that the Department agreed to implement the task force's recommendations which the Department estimates will take about 2 years to complete. While this action is encouraging, USDA has not specifically responded to our September 22, 1995, report recommending, among other things, that the Secretary of Agriculture report the Department's management of telecommunications as a material internal control weakness under the Federal Managers' Financial Integrity Act (FMFIA) and that this weakness remain outstanding until USDA fully complies with federal regulations for managing telecommunications and institutes effective management controls. USDA's fiscal year 1995 FMFIA report did not identify the Department's management of telecommunications as a material internal control weakness, and on March 1, 1996, USDA's acting Chief Financial Officer and Assistant Secretary for Administration told us that the Department had not determined whether to report telecommunications management as an material internal control weakness for fiscal year 1996. Since USDA has not yet established adequate and cost-effective controls for ensuring that its telephones are used properly, it is putting itself at continuing risk of telephone abuse and fraud. Moreover, because USDA does not know how widespread telephone abuse is at the Department or the total cost, it is not in a position to develop a plan defining cost-effective controls to mitigate the risk of telephone abuse and fraud or take appropriate action to address abuses that have occurred. We also found indications that USDA is vulnerable to other types of telephone fraud, waste, and abuse because bills are not reviewed. Billing records show that USDA agencies and offices in the Washington, D.C., metropolitan area pay tens of thousands of dollars each month for international calls. However, because these bills are generally not reviewed, USDA does not know whether these calls are authorized and it cannot detect instances where telephone fraud and abuse may have occurred. USDA is at risk of further waste and abuse by employees who use telephone company credit cards, instead of FTS 2000 Federal Calling Cards, to charge thousands of dollars in long-distance calls each month which are paid by USDA. These cards, which have been issued to USDA offices by commercial carriers, are not approved for use by the Department. USDA's telecommunications policy DR 3100-1 states that the only telephone credit card approved for use by USDA employees is the FTS 2000 Federal Calling Card. Even though this policy has been in place over 2 years, some USDA employees have continued to use telephone company credit cards to charge their long-distance calls. Consequently, employees may be using these cards to charge long-distance calls at commercial rates, which are, according to USDA, as much as three times higher than FTS 2000 rates. Moreover, USDA does not know whether calls charged to telephone company credit cards are authorized because, like other commercial telephone bills, credit card bills are generally paid by the Department without being reviewed. Also, USDA does not know whether there have been any cases of telephone fraud involving telephone company credit cards by individuals outside USDA because the Department has no inventory of these cards and it performs no periodic checks to ensure proper accountability over their use. Therefore, USDA cannot tell whether any of these cards have been lost or stolen. Although USDA officials were unable to tell us how many employees have telephone company calling cards, one official told us hundreds of agency staff have been using them regularly to charge long-distance services. USDA also does not know the extent to which it has been the victim of toll fraud committed by outside hackers. In this regard, USDA has had at least one instance where hackers broke into USDA's telephone system and, according to USDA records, made an estimated $40,000 to $50,000 in international long-distance calls over one weekend in March 1995. In this case, the hacker penetrated the Department's telephone system by successfully exploiting vulnerabilities in a USDA contractor's voice mail system. USDA only became aware of this incident after it was identified by a long-distance carrier and brought to the Department's attention. To make matters worse, USDA did not seek reimbursement for any of the fraudulent calls it paid for from the voice mail contractor even though the contractor acknowledged that it was to blame for the vulnerabilities in the voice mail system. The extent of USDA's telephone abuse and fraud problem is unknown and could be costing the Department thousands of dollars each month. Like other problems we identified in earlier reports, the Department lacks adequate management controls over the $50 million it spends each year for commercial telecommunications services. To its credit, the Department has begun to take positive steps toward addressing some of its telecommunications management weaknesses by planning an effort to reengineer telecommunications management and making billing data more accessible to agency managers for review. If successful, this effort, which will take about 2 years to implement according to USDA, should also help deter telephone abuse and fraud. However, without taking interim steps to determine its vulnerability to telephone abuse and fraud, identify cost-effective ways to enforce current policies and procedures, and investigate and take action on past abuses, the Department is at risk of continued losses to telephone abuse and fraud. We recommend that the Secretary direct the Assistant Secretary for Administration and the Chief Financial Officer, in cooperation with the Under Secretaries and the Office of Inspector General, to determine the risk of and vulnerability to telephone fraud, waste, and abuse departmentwide, develop an appropriate plan with cost-effective controls to mitigate these risks, and expeditiously implement this plan. In developing this plan, among other things the Department should consider determining whether there is a need to continue to accept collect calls and, if deemed necessary, evaluate the viability and cost-effectiveness of alternatives to collect calls such as offering toll free numbers. In the interim, the Department should identify and implement actions necessary, but at the same time cost-effective, to minimize USDA's exposure to telephone abuse. Alternatives that the Department might consider could include blocking collect calls to the Department, notifying commercial carriers to cancel all telephone company credit cards issued to USDA personnel, and/or identifying methods that other large organizations employ to combat telephone abuse and fraud. The Secretary should also direct the Assistant Secretary for Administration and the Chief Financial Officer, in cooperation with the Under Secretaries and the Office of Inspector General, to take appropriate disciplinary actions against employees involved in the telabuse cases we identified to ensure that these abuses are stopped immediately and recover losses where it is cost-effective to do so. We also recommend that the Secretary direct that billing records be reviewed to identify all long-distance and other service charges associated with the March 1995 hacker incident and expeditiously seek restitution for these amounts from the contractor responsible for the defective voice mail equipment that led to these charges. We further recommend that the Secretary of Agriculture, in accordance with 31 U.S.C. 720, provide a written statement on actions taken on recommendations contained in our prior report, USDA Telecommunications: Better Management and Network Planning Could Save Millions (GAO/AIMD-95-203), to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight. A written statement also must be sent to the House and Senate Committees on Appropriations. In addition, the Secretary should provide the appropriate congressional oversight committees with a report on the Department's planned actions to correct its telecommunications management weaknesses and mitigate the risk of telephone fraud, waste, and abuse. USDA's Assistant Secretary for Administration provided written comments on April 1, 1996, on a draft of this report. USDA's comments are summarized below and reproduced in appendix II. The Assistant Secretary agreed with the need to strengthen telecommunications management controls in the Department and to prevent fraud and abuse of telecommunications services. Regarding cases of abuse that we identified involving collect calls from correctional centers, the Assistant Secretary stated that on March 13, 1996, the deputy administrators for management within each USDA agency in the Washington, D.C., area were briefed on telephone abuse and provided copies of the past 6 months' commercial telephone bills to review. In addition, the Assistant Secretary stated that the deputy administrators were also given telephone numbers to investigate and were instructed to pursue disciplinary action against employees who are found to have abused the use of USDA telephones. The Assistant Secretary also stated that USDA is exploring the potential for blocking all third party and collect calls in the Washington, D.C., metropolitan area and nationwide, and replacing these services with the expanded use of "1-800" service and FTS 2000 telephone credit cards as a way of reducing telephone abuse and fraud. In addition, the Assistant Secretary stated that USDA will, as we recommended, seek reimbursement for the cost of all calls paid for by the Department during the March 1995 telephone hacker incident. The Assistant Secretary also agreed that telephone abuse and fraud at USDA is indicative of systemic weaknesses in the Department's existing processes for billing and paying for telecommunications services. In this regard, the Assistant Secretary stated that a team is now being assembled to begin work on implementing the telecommunications task force's recommendation which we discussed. We are encouraged by the actions described by the Assistant Secretary for Administration to prevent fraudulent use of government telephones at USDA. While the Assistant Secretary did not respond to our specific recommendations, it is important for the Department to address actions it plans to take on each recommendation as it moves ahead in preventing telephone fraud and abuse. It is especially important for the Department to implement our first recommendation that the Secretary direct the Assistant Secretary for Administration and the CFO, in cooperation with the Under Secretaries and the OIG, to determine the risk of and vulnerability to telephone fraud, waste, and abuse departmentwide, develop an appropriate plan with cost-effective controls to mitigate these risks, and expeditiously implement this plan. We are sending copies of this report to the Secretary of Agriculture; the Chairmen and Ranking Minority Members of the Senate Committee on Governmental Affairs, the Senate and House Committees on Appropriations, the House Committee on Agriculture, and the House Committee on Government Reform and Oversight; the Director of the Office of Management and Budget; the Administrator of the General Services Administration; and other interested parties. Copies will also be made available to others upon request. Please contact me or Steve Schwartz at (202) 512-6240 if you or your staff have any questions concerning the report. To assess USDA's controls over telephone use, we obtained and reviewed commercial telephone billing records representing 4 monthly billing periods during fiscal year 1995 for USDA agency offices in the Washington, D.C., metropolitan area. Our 4-month sample of commercial telephone billing records totaled about $580,000 or 1 percent of the $50 million USDA spends annually for commercial telecommunications costs. The four months in our review--December 1994, March 1995, July 1995, and August 1995--were selected from early, mid, and late parts of the fiscal year to adjust for any seasonal variations in calling patterns. We reviewed billing records of all collect calls accepted by the Department during these 4 months as well as selected long-distance calls made during the month of August 1995. We were unable to review all of USDA's telephone bills for the periods covered by our review because the Department did not provide all the bills to us by the end of our audit work in February 1996. According to the official at USDA's National Finance Center responsible for handling our request for bills, there were delays because complex computer runs were necessary to identify commercial billing accounts associated with all the 24,000 separate telephone lines in the Washington, D.C., metropolitan area and because a manual process is used at the National Finance Center for tracking down each paper bill. USDA subsequently provided additional bills in March 1996, but since this information was submitted after we had completed our audit work, it was not included in our report. To confirm that the cases we identified involved telephone abuse, we also discussed them with officials in USDA's Office of Information Resources Management as well as telephone company representatives and we provided records for these calls to USDA officials for appropriate action. To obtain detailed information on cases of collect calling abuse we found, we interviewed correctional facility personnel about cases involving collect calls from correctional centers and discussed these cases with officials in USDA's Office of Inspector General and Office of Information Resources Management. In addition, we reviewed telephone company records and USDA documentation pertaining to a March 1995 hacker case at the Department and interviewed telephone company representatives, voice mail vendor staff, and USDA officials involved in the incident. To identify USDA's procedures for processing commercial telephone bills for its offices in the Washington, D.C., metropolitan area, we interviewed officials from USDA Office of Information Resources Management and General Services Administration. We also reviewed industry publications and reports on telabuse and toll fraud. We examined the Department's policies and procedures for managing the use of government telephones and commercial telephone and long-distance services and USDA plans for improving telecommunications management controls. We performed our audit work from October 1995 through February 1996, in accordance with generally accepted government auditing standards. Our work was primarily done at USDA headquarters in Washington, D.C. We also conducted work at the General Services Administration in Washington, D.C.; Prince George's County Correctional Center in Upper Marlboro, Maryland; and the Animal and Plant Health Inspection Service in College Park, Maryland. 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Pursuant to a congressional request, GAO reviewed the Department of Agriculture's (USDA) use of its telecommunications resources, focusing on: (1) whether USDA ensures that the commercial telephone and long-distance services it pays for are used in accordance with federal regulations and departmental policy; and (2) USDA efforts to address recommendations from a previous GAO report. GAO found that: (1) during the 4-month period reviewed, collect calls from federal, state, and county correctional institutions were accepted at 20 USDA offices in the District of Columbia area and may have been transferred to USDA long-distance lines; (2) these collect calls amounted to 50 percent of the collect calls accepted at these USDA offices and cost about $2,600; (3) despite the discovery of inappropriately accepted collect calls as early as 1993, USDA did not initiate adequate measures to stop the abuses; (4) USDA offices in the District area made unauthorized long-distance calls, including international calls to adult entertainment lines and companies advertising jobs; (5) such fraud and abuse exist because USDA does not review its commercial telephone bills; (6) despite some positive actions to control fraud and abuse, USDA has not responded to GAO recommendations concerning the inappropriate use of its telecommunications resources; and (7) USDA is vulnerable to more fraud, waste, and abuse because it does not review its telephone and telephone credit card bills.

Congress established the RFS as part of the Energy Policy Act of 2005, in response to concerns about the nation's dependence on imported oil. The RFS initially required that a minimum of 4 billion gallons of renewable fuels be blended into transportation fuels in 2006, ramping up to 7.5 billion gallons by 2012. Two years later, the Energy Independence and Security Act of 2007 (EISA) increased and expanded the statutory target volumes for renewable fuels and extended the ramp-up period through 2022. More specifically, the act established overall target volumes for renewable fuels 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. Advanced biofuel is a catch-all category that may include a number of fuels, including those 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. EPA administers the RFS in consultation with DOE and USDA. EPA's responsibilities for implementing the RFS include setting annual volume requirements. Each year, by November 30, EPA is required to establish via rulemaking the volumes of biofuel that must be blended into transportation fuels during the following calendar year (volume requirement). The statute provides EPA with waiver authority to set volumes below the targets specified in the statute under certain circumstances, such as when there is inadequate domestic supply. The structure of the volume targets emphasized conventional biofuels 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.1). Further, 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. In this case, 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. However, in the volume requirement it finalized in November 2016, EPA effectively set the amount of conventional biofuels required under the program at 15 billion gallons, equal to the statutory target for 2017 (see fig.1). In our November 2016 report, we found that the federal government has supported R&D related to advanced biofuels through direct research or grants, and the target of this R&D is shifting away from cellulosic ethanol and toward drop-in biofuels. Unlike corn-starch-based or cellulosic ethanol, drop-in fuels, such as renewable gasoline, are fully compatible with existing infrastructure, such as vehicle engines and distribution pipelines. In fiscal years 2013 through 2015, the federal government obligated more than $1.1 billion for advanced biofuels R&D. Of this amount, DOE obligated over $890 million. For example, DOE's Office of Science funds three bioenergy research centers affiliated with universities and national laboratories that conduct basic research for all stages of biofuel production. In addition, USDA obligated over $168 million in fiscal years 2013 through 2015 to support advanced biofuels. For example, USDA scientists developed a novel process to increase production of butanol, a drop-in fuel that lowered production costs by over 20 percent. The remaining federal obligations during these years were through EPA, DOD, and NSF, which obligated less for such R&D. According to agency officials, agencies are shifting their focus to drop-in fuels in part because these fuels are compatible with existing infrastructure. Officials from one federal funding agency said this compatibility makes drop-in fuels more desirable than cellulosic ethanol. As we reported in November 2016, experts told us that the technology to produce several advanced biofuels is well understood but noted that among those currently being produced there is limited potential for increased production in the near term. Experts further cited multiple factors making it challenging to significantly increase the speed and volume of production. In addition, current advanced biofuel production is far below overall RFS target volumes, and those volumes are increasing every year. Consequently, it does not appear possible to meet statutory target volumes for advanced biofuels in the RFS under current market and regulatory conditions. Biofuels that the experts identified as being technologically well understood include biodiesel, renewable diesel, renewable natural gas, cellulosic ethanol, and some drop-in fuels. A few of these fuels are being produced in significant volumes, but the overall volume being produced falls short of the volume target in the RFS. For example, in 2015, about 3.1 billion ethanol equivalent gallons of advanced biofuels were produced, falling short of the statutory target of 5.5 billion gallons for that year. By 2022, the advanced biofuels target increases to 21 billion gallons, so production would have to rapidly increase to meet this target. Even though a few of these fuels, such as biodiesel and renewable diesel, are being produced in significant volumes, it is unlikely that production of these fuels can expand much in the next few years because of feedstock limitations. Current production of cellulosic biofuels is far below the statutory volume targets and, according to the experts, there is limited potential for expanded production to meet future higher targets, in part because production costs are currently too high. Experts told us that technologies to produce other fuels, such as some drop-in fuels, are well understood, but that those fuels are not being produced because production is too costly. Experts identified a number of factors that will affect the speed and volume of advanced biofuel production, including the following. The low price of fossil fuels relative to that of advanced biofuels. This disparity in price is a disincentive for consumers to adopt greater use of biofuels and also a deterrent for private investors entering the advanced biofuels market. Uncertainty about government policy, including whether the RFS and federal tax credits that support advanced biofuels will continue to be in effect. While such policies should encourage investment, investors do not see them as reliable and thus discount their potential benefits when considering whether to invest. High cost of converting cellulosic feedstocks. These costs include transporting and handling feedstocks, processing them into a fuel, and disposing of wastes, among other things. Time and cost to bring a new technology to commercial-scale production. The timeline to bring a new technology from laboratory scale to commercial scale is 12 years if everything works well, and it can be considerably longer. Time and cost to secure fuel certification and acceptance. Before a fuel is brought to market, it must go through regulatory registration, certification by ASTM International, and other testing. Underdeveloped feedstock supply chain. Lack of logistics for the entire feedstock supply chain--from securing a contract to delivering and storing a feedstock--is an economic barrier to the production of advanced biofuels. As we found in our November 2016 report, it is unlikely that the goals of the 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 and limited potential for expanded production by 2022. Advanced biofuels achieve greater greenhouse gas reductions than conventional biofuels, although the latter account for most of the biofuel blended into domestic transportation fuels under the RFS. As a result, the RFS is unlikely to achieve greenhouse gas emissions reductions as envisioned. For example, the cellulosic biofuel blended into the domestic transportation fuel supply in 2015 was less than 5 percent of the statutory target of 3 billion gallons. Partly as a result of low production of advanced biofuels, EPA has reduced the RFS targets for such fuels through waivers in each of the last 4 years. According to experts we interviewed, the shortfall of advanced biofuels is the result of high production costs, and the investments in further R&D required to make these fuels more cost-competitive with petroleum-based fuels, even in the longer run, are unlikely in the current investment climate. Given the relative scarcity 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. The use of corn-starch ethanol has been effectively capped at 15 billion gallons. As a result, expanded use of biofuels will require increasing use of advanced biofuels, and experts told us the most likely advanced biofuel to be commercially produced in the near- to mid-term will be cellulosic ethanol. However, the ability to add ethanol to the transportation fuel market to meet expanding RFS requirements is limited by the incompatibility of ethanol blends above E10 (up to 10 percent ethanol) 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. Several experts raised concerns about the extent to which the RFS is achieving its goal for reducing greenhouse gas emissions, 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. Further, corn-starch ethanol plants that were in operation or under construction before December 19, 2007, are 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 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. As we reported in November 2016, while advanced biofuels are not likely to be produced in sufficient quantities to meet the statutory targets, experts identified actions that they suggested could improve the existing RFS framework by incrementally increasing investment in advanced biofuels, which may lead to greater volumes of these fuels being produced and used in the longer term. For example, 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. One expert 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. In addition, experts identified actions to increase compatibility of infrastructure with higher ethanol blends. For example, 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. Through this partnership, USDA is investing $100 million to install nearly 5,000 pumps offering high-ethanol blends in 21 states. However, 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 transportation fuel 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 improve fueling infrastructure. As we reported in November 2016, several experts stated that the RFS is not the most efficient way to achieve the environmental goal of reducing greenhouse gas emissions, and they suggested policy alternatives--in particular, a carbon tax and a low carbon fuel standard (LCFS). Several experts suggested that these alternatives 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 reductions in greenhouse gas emissions, a carbon tax or LCFS would incentivize the technologies that achieve the greatest such reductions at the lowest cost. 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, a carbon tax could sustain consumers' interest in fuel-saving vehicles and 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 of the light-duty vehicle fleet 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 biofuels R&D, in effect undermining the RFS goal to expand that sector. In light of these concerns, several experts said that an LCFS would be more flexible and efficient than the RFS or a carbon tax at developing biofuels that achieve the greatest greenhouse gas reductions. Specifically, an LCFS accounts for carbon in a given fuel 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 an LCFS 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. Chairman Lankford, Ranking Member Heitkamp, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. If you or your staff members have any questions concerning this testimony, please contact Frank Rusco, Director, Natural Resources and Environment, at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions to this testimony include Karla Springer, Assistant Director; Jesse Lamarre-Vincent; Marietta Revesz; and Jarrod West. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Since 2006 the RFS has required that transportation fuels--typically gasoline and diesel--sold in the United States be blended with increasing volumes of biofuels to meet environmental and energy goals. Annual targets for the volumes of biofuels to be blended are set by statute. EPA is responsible for adjusting the statutory targets through 2022 to reflect expected U.S. industry production levels, among other factors, and for setting volume targets after 2022. Biofuels included in the RFS are either conventional (primarily corn-starch ethanol) or advanced biofuels (e.g., cellulosic ethanol and biomass-based diesel). Advanced biofuels emit fewer greenhouse gases than petroleum-based fuels and corn-starch ethanol. In November 2016, GAO issued two reports on the RFS. This testimony is based on those two reports: GAO-17-94 and GAO-17-108 . It provides information on whether the RFS is expected to meet its production and other targets, as well as expert views on any federal actions that could improve the RFS framework, among other things. For the reports on which this testimony is based, GAO analyzed legal requirements and EPA data. In addition, GAO worked with the National Academy of Sciences to convene a meeting of experts from industry, academia, and research organizations in May 2016. GAO also contracted with the National Academy of Sciences for a list of experts on issues related to the RFS. Further information on how GAO conducted its work is contained in the reports. It is unlikely that the goals of the Renewable Fuel Standard (RFS)--to reduce greenhouse gas emissions and expand the nation's renewable fuels sector while reducing reliance on imported oil--will be met as envisioned because there is limited production of advanced biofuels and limited potential for expanded production by 2022. Advanced biofuels, such as cellulosic ethanol and biomass-based diesel, achieve greater greenhouse gas reductions than conventional biofuels (primarily corn-starch ethanol), but the latter account for most of the biofuel blended into domestic transportation fuels 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. Partly as a result of low production of advanced biofuels, the Environmental Protection Agency (EPA), which administers the RFS in consultation with other agencies, has reduced the RFS targets for such fuels through waivers in each of the last 4 years (see figure). According to experts GAO interviewed, the shortfall of advanced biofuels is due to high production costs. The investments required to make these fuels more cost-competitive with petroleum-based fuels, even in the longer run, are unlikely in the current investment climate, according to experts.

The United States has historically sought to attract international students to its colleges and universities. In recent years international students have earned about one-third or more of all of the U.S. degrees at both the master's and doctoral levels in several of the science, technology, engineering, and mathematics (STEM) fields. In academic year 2002-2003 alone, international students earned between 45 percent and 57 percent of all the STEM degrees in the United States. Several federal agencies coordinate efforts to attract and bring international students to the United States and implement related requirements. The Department of State (State) manages the student visa application process, administers some student exchange programs, offers grants to facilitate international exchanges, and provides information promoting educational opportunities in the United States. State's Bureau of Educational and Cultural Affairs supports a global network of more than 450 advising centers around the world that provide comprehensive information about educational opportunities in the United States and guidance on how to access those opportunities. In addition, the Undersecretary for Public Diplomacy and Public Affairs has undertaken ongoing efforts at outreach. For example, the office has organized several delegations of American university presidents to travel overseas with the Undersecretary in order to emphasize the United States' interest in welcoming international students. The Department of Homeland Security enforces immigration laws and oversees applications for changes in immigration status. It also administers the Student and Exchange Visitor Information System (SEVIS), an Internet-based system that maintains data on international students and exchange visitors before and during their stay in the United States. Finally, the Department of Education (Education) sponsors initiatives to encourage academic exchanges between the United States and other countries, and the Department of Commerce offers various activities to help U.S. educational institutions market their programs abroad. Students or exchange visitors interested in studying in the United States must first be admitted to a U.S. school or university before starting the visa process. Most full-time students enter the United States under temporary visas, which usually permit them to stay for the duration of their studies but may require renewals if they return home before their studies are complete. In order to apply for a visa at a U.S. embassy or consulate, students are required to submit a SEVIS -generated document issued by a U.S. college or university or State-designated sponsor organization when they apply for a visa. State advises student applicants to apply early for a student or exchange visitor visa to make sure that there is sufficient time to obtain an appointment for a visa interview and for visa processing. Among the long-standing requirements for students applying for a visa is that they demonstrate an "intent to return" to their country of origin after they complete their studies. Graduates who wish to stay and work in the United States beyond the time allowed by their student visas generally need to receive approval for a change in status, for example, through a temporary work visa or through permanent residency. Although the United States continues to enroll more international students than any other country, the number of international students enrolled in U.S. higher education institutions leveled off and even dropped slightly after 2001, as shown in figure 1. Figure 2 shows that the U.S. share of international students worldwide decreased between 2000 and 2004. According to the Institute of International Education, the decline in the number of international students attending U.S. higher education institutions between 2002 and 2003 was the first drop in over 30 years. While some preliminary data suggest that international student enrollment numbers may be rebounding, enrollments have yet to return to previous levels. Nevertheless, the United States continues to be a prime study destination for international students for numerous reasons: its high- quality higher education institutions, top-ranked graduate programs, strong research funding, English-language curriculum, and a diverse foreign-born faculty. As worldwide demand for higher education continues to rise, changes in the global higher education landscape have provided students with more options. For example, technological advancements have spurred online courses and even completely online programs that cater largely to nontraditional students having work and family commitments. Between 1995 and 2001, enrollment in distance education at the college level nearly quadrupled to over 3 million students, according to Education's most recent data. In addition, international partnerships allow institutions to share faculty members and facilitate study abroad opportunities. International branch campuses now provide international students the opportunity to receive an American education without leaving their home country. Greater competition has prompted some countries to embrace instruction in English and encouraged other systems to expand their recruiting activities and incentives. Germany alone offers nearly 400 courses in English that are geared toward international students. In terms of recruiting, several of the participants during our global competitiveness and higher education forum suggested that some countries appear more committed to attracting international students than the United States or are now competing with the United States for the best and the brightest students. Japan offers the same subsidized tuition rates to international students as domestic students, while Singapore offers all students tuition grants covering up to 80 percent of tuition fees as long as they commit to working in Singapore for 3 years after graduation. France and Japan have also strengthened and expanded their scholarship programs for international students. Some countries' recruiting efforts include providing scholarships to international students who may not be able to afford the costs of obtaining a higher education degree in the United States. In addition, some countries have also developed strategic plans or offices that address efforts to attract international students. The German Academic Exchange Service and EduFrance offer examples where government agencies have been tasked with international student recruitment. Participants at GAO's forum on global competitiveness expressed concerns that the United States lacked such a national strategy for recruiting international students and emphasized a need to both explore new sources of international students as well as cultivate U.S. domestic capacity. As the cost of attending college in the United States rises, international students may be discouraged from coming here to study. Higher education in the United States ranks among the most expensive in the world. As shown from OECD data in table 1, in 2003-2004 annual average tuition at public U.S. colleges and universities ($4,587) was second only to Australia ($5,289) and more than 2.5 times higher than Europe's system with the highest tuition fees, that of the United Kingdom. In terms of private higher education providers, U.S. institutions ranked the highest at more than $17,000 per year followed by Australia ($13,420), Italy ($3,992), and Portugal ($3,803). Moreover, student costs at U.S. colleges and universities continue to rise. Figure 3 depicts average undergraduate tuition and room and board costs between 1976 and 2004 for full-time students in degree-granting programs at both 4-year public and private higher education institutions as well as public 2-year institutions. Average costs for private colleges and universities have risen the most since 1990, from $13,237 to $26,489. However, in percentage terms the most growth took place at 4-year public institutions; the change between 1990 and 2004 was approximately 118 percent compared to a 100 percent increase at 4-year privates and an 83 percent increase at 2-year institutions. International students generally do not rely on U.S. federal funding to study in the United States. According to the Institute of International Education's Open Doors 2004/2005 report, which provides data on international student mobility patterns from U.S. universities, an estimated 71 percent of all international students reported their primary source of funding coming from personal and family sources or other sources outside of the United States. The effects of high and rising tuition and other factors on international enrollment patterns are difficult to estimate, but some policymakers are concerned that costs may be discouraging some international students from coming to U.S. higher education institutions. After September 11, State and Homeland Security, as well as other agencies, took various steps to strengthen the visa process as an antiterrorism tool. This has made the visa process more robust, but may have contributed to real and perceived barriers for international students as well as fueled perceptions that international students were not welcome. Almost all visa applicants must now be interviewed by a consular adjudicating officer at a U.S. embassy or post; this requirement has both affected the number of visas issued and extended wait times for visas under certain circumstances. We have reviewed aspects of the visa process and have made many recommendations to strengthen the process in a way that reduces barriers for international students while balancing national security interests. In October 2002 we cited the need for a clear policy on how to balance national security concerns with the desire to facilitate legitimate travel when issuing visas and made several recommendations to help improve the visa process. In 2003, we reported that the Departments of State, Homeland Security, and Justice could more effectively manage the visa process if they had clear and comprehensive policies and procedures as well as increased agency coordination and information sharing. In 2005 we reported on State's management of J-1 exchange programs. Separately in 2005, we reported on the department's efforts to improve the time required to process visas for international science students and scholars as well as others. In 2004 we found that the time to adjudicate a visa depended largely on whether an applicant had to undergo a Visas Mantis security check. Visas Mantis security checks target foreigners who might be involved in violation or evasion of U.S. laws by exporting goods, software, technology, or sensitive information, aiming to prevent proliferation of weapons of mass destruction and conventional weapons. Between January 2004 and June 2006, almost 28 percent of all visa applications sent for Mantis security checks were for students or exchange participants. State has acknowledged that long wait times may discourage legitimate travel to the United States, potentially costing the country billions of dollars in economic benefits, including from foreign students, and adversely influencing foreign citizens' impressions and opinions of our nation. Much progress has been made over the years with respect to the visa process. Since 2002, State and other agencies have implemented many of our recommendations aimed at strengthening the visa process as an antiterrorism tool while improving processes to facilitate legitimate travel. In particular, State has issued standard operating procedures, in consultation with Homeland Security, to inform consular officers on issues such as special security checks and student visa requirements. In 2005, we reported a significant decline in both Visas Mantis processing times and cases pending more than 60 days. Recent visa data show an increase in the number of student visas issued in the last few years. According to State Department data, the combined student visa issuance levels for fiscal year 2006 increased by about 20 percent from fiscal year 2002. See figure 4 for the issuance trends for individual student visa categories. Broader efforts to facilitate travel to the United States for international students have also been implemented. State has expedited interviews for students. In addition, the length of time that some visa clearances are valid has been extended. In February 2007, State issued guidance to posts that applicants should receive an appointment for a student visa interview within 15 days or less. We are continuing to study aspect of these issues, including visa delays and Visas Mantis security checks, which we will be reporting on in the coming months. The United States must maintain an appropriate balance between protecting national security interests and ensuring our long-term competitiveness. The United States has relied on undergraduate and graduate students from other countries to support both economic and foreign policy interests. Changes designed to protect national security in the wake of September 11 may have contributed to real and perceived barriers for international students, and the subsequent decline in international enrollments raises concerns about the long-term competitiveness of U.S. colleges and universities. Rising U.S. tuition costs and growing higher education options worldwide further demonstrate that the United States cannot take its position as the top destination for international students for granted. While federal efforts to reduce barriers for international students have helped, monitoring current trends and federal policies is essential to ensuring that the United States continues to obtain talented international students in the face of greater global competition. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other members of the subcommittees may have at this time. For further information regarding this testimony, please contact me at (202) 512-7215. Individuals making key contributions to this testimony include Sherri Doughty, Carlo Salerno, Marissa Jones, John Brummet, Eugene Beye, Carmen Donohue, Eve Weisberg, Melissa Pickworth, and Susannah Compton. 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.

More international students obtain a higher education in the United States than in any other country, and they make valuable contributions while they are here. For those students returning home after their studies, such exchanges support federal public diplomacy efforts and can improve understanding among nations. International students have earned about one-third or more of all U.S. degrees at both the master's and doctoral levels in several of the science, technology, engineering, and mathematics fields. Yet recent trends, including a drop in international student enrollment in U.S. colleges and universities, and policy changes after September 11, 2001, have raised concerns about whether the United States will continue to attract talented international students to its universities. This testimony is based on ongoing and published GAO work. It includes themes from a September 2006 Comptroller General's forum on current trends in international student enrollment in the United States and abroad. Invitees to the forum included experts from the Congress, federal agencies, universities, research institutions, higher education organizations, and industry. GAO identified key issues that may affect the United States' ability to continue attracting the world's most talented international students to our universities and colleges. First, the global higher education landscape is changing and providing more alternatives for students, as other countries expand their educational capacity and technology-based distance learning opportunities increase. For example, enrollment in college-level distance education has nearly quadrupled since 1995. In addition, U.S. universities are establishing branch campuses in other countries and partnerships with international institutions, allowing international students to receive a U.S. education without leaving home. Greater competition has prompted some countries to offer courses in English and to expand their recruiting activities and incentives. Some countries also have developed strategic plans or offices focused on attracting international students. Second, the cost of obtaining a U.S. degree is among the highest in the world and rising, which may discourage international students. Average tuition in 2003 at public U.S. colleges and universities was second only to Australia. Moreover, tuition and associated costs continue to rise. While the effects of high and rising costs and related factors are difficult to estimate, some policymakers are concerned they may be discouraging international students from coming to the United States. Lastly, visa policies and procedures, tightened after September 11 to protect our national security, contributed to real and perceived barriers for international students. Post-September 11 changes included a requirement that almost all visa applicants be interviewed, affecting the number of visas issued and extending wait times for visas under certain circumstances. GAO has made several recommendations to strengthen the visa process in a way that reduces barriers for international students while balancing national security, and recent changes have improved the process. Processing times for certain security reviews have declined, and recent data show more student visas issued in the last few years. The Department of State also has taken steps to ease the burden on students, including expediting interviews and extending the length of time that some visa clearances are valid. We are continuing to study aspects of these issues. The United States must maintain an appropriate balance between protecting national security interests and ensuring our long-term competitiveness. Monitoring current trends and federal policies is essential to ensuring that the United States continues to obtain talented international students in the face of greater global competition.

ICPs provide services associated with the acquisition, distribution, maintenance, and disposal of consumable and reparable parts, and supplies needed to operate weapon systems and components. DLA manages 5 ICPs at 5 locations, and the services manage 11 ICPs at 13 locations. DLA's ICPs manage consumable items such as repair parts, personnel support items, fuel, and other bulk items and material. The services' ICPs manage reparable components, subsystems, and assemblies and selected consumable items. The 16 ICPs employ about 24,000 people and manage parts valued at approximately $69 billion. The number of ICPs is expected to be reduced to 11 ICPs at 13 locations by fiscal year 2003.(See app. I for a list of service and DLA ICPs by location and by those that are scheduled for downsizing.) In past reports, we criticized DOD's logistics system as being cumbersome, inefficient, and costly. Likewise, since at least the 1970s, DOD has recognized and been concerned about overlap and duplication in its logistics system and other inefficiencies. In 1989, OSD proposed a review to consolidate ICPs under a single service or agency manager, but the services strongly opposed the idea because they believed their ability to support weapon systems effectively would be adversely affected. However, in the National Defense Authorization Act for Fiscal Year 1996, Congress required the Secretary of Defense to review the management of all DOD ICPs by DLA, including service-managed reparable items. Thus, in April 1996, the Deputy Under Secretary of Defense for Logistics tasked the Logistics Management Institute (LMI) to conduct such a review. On November 19, 1996, OSD reported the results of its review to Congress and provided a copy to the Comptroller General of the United States. The report concluded that cumulative savings during fiscal years 1998 to 2010, ranging from $2.2 billion to $3.8 billion, might accrue if the management of all ICPs were transferred to DLA. The report also noted the services' concerns regarding the transfer, principally the risk of disrupting the intraservice integration of material and weapon system management. The report noted, however, that actions could be taken to lessen the risks. Given the services' concerns, the report stated that DOD, through its QDR and other future planning and programming efforts, would examine alternatives that might provide similar savings at less overall risk. LMI developed a scenario for consolidating the service ICPs under a single manager within DLA and identified the associated potential costs, benefits, and risks. LMI recognized that if the proposed consolidation were to occur, the implementation might differ from its scenario, and the major personnel reductions and site consolidations envisioned in the review would likely have to undergo a process similar to that recently used for BRAC actions. Therefore, LMI considered its analysis conceptual in nature because it did not address specifics, such as which ICPs to close and which to retain. The analysis was intended to indicate only whether the consolidation has merit. Under LMI's scenario, the consolidation would take place during fiscal years 1998-2010, reduce the number of ICPs to either six or three, and affect at least 12,000 people. Figure 1 is a chronology of LMI's scenario, the actions projected to occur, and the associated range of savings. No actions would be scheduled during this period of steady-state savings; the movement of ICP personnel would be completed by fiscal year 2008. $0.7 billion to $1.2 billion saved DLA would reduce the number of ICPs and standardize systems and procedures. Remaining business process improvements would be implemented. $0.9 billion to $1.6 billion saved Under DLA management, service ICPs would continue with the same service people, policies, systems, and procedures (i.e., transfer in place). DLA could elect to consolidate support functions regionally or at a single site to reduce the number of personnel required. Some business process improvements would be implemented. $0.6 billion to $1.0 billion saved A 1-year period of decision-making and pre-implementation planning. To identify the cost savings of its scenario, LMI considered three areas through which savings were possible: (1) a transfer in place, (2) site consolidation, and (3) business process improvements. (See app. II for a list of the business improvements identified by LMI.) LMI developed the cost savings for the transfer in place and site consolidations using the services' and DLA's ICP and supporting headquarters cost data. For the business process improvements, however, LMI could not obtain complete data from the services for all 16 improvements, but was able to price 4 individual initiatives that would result from the transfer. To develop the potential cost savings in these areas, LMI used cost factors and made assumptions that were conservative in nature. According to an LMI official, the team's conservative approach was designed to avoid overstating the anticipated cost savings. After examining the report on consolidation, we believe OSD's approach was reasonable, given the sensitive nature of the issue, the limited amount of time to perform the review, and the data available. However, we concluded that the cost savings estimates would have been $1.3 billion to $2.3 billion greater if BRAC principles had been used. Also, indications are that the savings estimates would be even greater if the review included the savings associated with all 16 business process improvements and likely future improvements to the material management information systems. Full achievement of these additional savings is dependent on the consolidation of the ICPs under a single manager. Given the short time frame LMI had to review the ICP consolidation, it performed a conceptual analysis to show whether savings were possible. It did not use the cost of base realignment actions (COBRA) model, which was used during the four BRAC rounds since 1988 to evaluate the cost of stationing alternatives. Although LMI was not required to use the model, COBRA was the proven, standard means for analyzing proposed consolidations. We recognize the difficulty in using the COBRA model because it requires the collection of a large amount of data and numerous assumptions, such as which sites to retain and which to close. Had LMI used some of the BRAC principles that were used in the COBRA model, such as a longer period of steady-state savings and a present value analysis in arriving at its cost savings estimates, the combined effect would have resulted in larger estimated savings. More importantly, using these BRAC principles provides a way of showing cost savings estimates that are consistent with how DOD projected costs and savings in previous BRAC rounds. To illustrate, BRAC legislation required that consolidations be completed in no more than 6 years and that DOD project savings over a 20-year period, thus ensuring at least 14 years of steady-state savings. BRAC also required the use of a present value analysis to reflect the value of money over time. LMI projected cost savings over a 13-year period (i.e., fiscal years 1998-2010), which included an 11-year implementation period and 2 years of steady-state savings. Its analysis also did not consider the time value of money. An LMI official told us that, given more time, it would have considered using a present value analysis and a longer time period. We adjusted LMI's cost savings estimates by applying these two BRAC principles without changing LMI's scenario or assumptions. Specifically, we extended LMI's ending time frame from fiscal year 2010 to 2022 to allow 14 years of steady-state savings and performed a present value analysis on LMI's cost savings estimates, using a rate of 4 percent. Table 1 shows the results of our adjustments. LMI's analysis could be adjusted in many ways if the scenario assumptions were changed. We could have used a 20-year period (fiscal years 1998-2017), which would include 14 years of steady-state savings. Although we believe this alternative calculation would generate savings similar to or greater than those from our analysis, we would have had to make numerous assumptions about LMI's consolidation scenario. For example, by achieving consolidation within the first 6 years (i.e., between fiscal year 1998 and 2003, or sooner), DOD could increase the potential cost savings even more. We have previously reported on the effect of implementing BRAC actions sooner and the resulting increase in savings. The savings identified in LMI's analysis do not include potential savings from all 16 business process improvements and a DOD-wide material management information system. We were unable to quantify these associated costs and savings, but we believe their inclusion into LMI's analysis would increase LMI's cost savings estimates. Although LMI identified 16 business process improvements from which savings could be anticipated, it estimated costs and savings for only 4. These four, however, account for a significant portion of the overall estimated savings--ranging between $1.5 billion and $2.7 billion. Nevertheless, the additional 12 could also result in savings. According to LMI officials, these business process improvements are a sample of improvements that DLA could make as a single manager for all DOD ICPs, to include improving the contracting methodology and process, deleting inactive parts, and improving material acquisitions and inventory storage. According to an LMI official, LMI estimated savings for only four improvements because of the lack of data, time constraints, and limited resources. Service officials stated that the savings associated with these four process improvements duplicate ongoing service efforts and should not be considered in this analysis. However, they did not provide data to support their statements. We believe that even greater savings could be achieved if the business process improvements were implemented by a single manager across service lines for all of DOD's ICPs. At the time of LMI's analysis, DOD was planning to implement the Material Management Standard System to be used at its ICPs. In July 1995, DOD estimated it would spend about $5.3 billion to develop, deploy, and maintain the system at its ICPs, and it expected the effort to produce as much as $15 billion in savings over a 15-year period. According to an LMI official, Material Management Steering Group officials told the LMI team not to consider using these numbers because of the questionable costs and savings estimates. We later reported that DOD had underestimated the costs and overestimated the savings. Because of difficulty in developing the system, the strategy to develop and implement a standard material management system was abandoned. According to a former senior official involved in the development of the system, progress was marred by incompatible service goals that could be overcome if the ICPs were consolidated under a single organization such as DLA. DOD officials told us that they did not believe a standard system would work, considering the differences in how each service does business. However, LMI and several military officials said that a standard database that could be shared was needed. Although the costs and savings associated with a standard system are not easily quantifiable, we believe that successful implementation of a standard system or database would be more likely and savings would be achievable under a single organization. The National Defense Authorization Act for Fiscal Year 1997 established the QDR to examine defense requirements and strategy and develop a revised defense program through 2005. The act also established an NDP to review the QDR's work and provide you with recommendations for improvements to the QDR's review, which it did on May 15, 1997. In addition, the NDP will report to you on additional matters by December 1, 1997. DOD established a QDR Infrastructure Panel Logistics Task Force to examine DOD's infrastructure issues, including ICP consolidation alternatives. The Logistics Task Force considered six alternatives (see app. III for a list of all six alternatives) and decided against consolidating service ICPs and reparable inventory under DLA, even though the savings estimates were much greater than any other alternative. Instead, the task force recommended establishing one ICP per service with multiple locations. Only the recommended alternative was forwarded to the NDP for its consideration. In the NDP's May 15, 1997, report, the NDP reported on the QDR's changes and reductions to DOD's infrastructure but did not specifically address ICP consolidation. According to an NDP staff member, DOD infrastructure issues are still being considered by the Panel, but it is uncertain whether ICP infrastructure will be addressed in the NDP's December 1, 1997, report. Although substantial savings are possible by consolidating the services' ICPs under DLA, the services have resisted such proposals, citing potential risks that could affect operational effectiveness. Given this situation, we recommend that you ask the NDP to examine the savings and risks associated with ICP consolidation under DLA. As you know, 31 U.S.C. 720 requires the head of a federal agency 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 and Oversight not later than 60 days after the date of the report and to the Senate and House Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of the report. DOD generally concurred with our findings, but stated that without addressing the risks associated with the consolidation, our cost savings projections would not be very meaningful. (See app. IV for a reproduction of DOD's comments.) We agree with DOD that the risks cannot be ignored. However, as indicated in the OSD report, these potential risks can be mitigated. Given these circumstances, we believe that the NDP should examine both the savings and risks associated with the consolidation of ICPs under DLA. Although this recommendation was not in the draft report DOD reviewed, our subsequent review of the QDR and NDP reports prompted us to add this recommendation. During our review, we evaluated matters related to the cost of the proposed transfer of service-managed ICPs to DLA. We did not address the risks associated with the proposed transfer, nor did we examine any of DOD's ongoing initiatives in the logistics infrastructure area. However, we did obtain some information on pertinent matters considered by the Logistics Infrastructure Panel of the QDR. To obtain an overall service perspective on the cost aspects of the report, we held discussions with cognizant officials from OSD; the Joint Chiefs of Staff; and headquarters and installations of the Army, Navy, Marine Corps, Air Force, and Defense Logistics Agency, and reviewed documents provided by the services. Locations visited included the Communications and Electronics Command, Fort Monmouth, New Jersey; the Naval Inventory Control Point and Naval Supply Systems Command, Mechanicsburg, Pennsylvania; Naval Sea Systems Command, Washington D.C.; Air Force Materiel Command, Dayton, Ohio; and Oklahoma City Air Logistics Center, Oklahoma City, Oklahoma. To understand the report's methodology for estimating costs, we talked with OSD and LMI officials, reviewed LMI-prepared data and spreadsheets, and randomly checked LMI's calculations. To estimate additional potential cost savings, we adjusted LMI's data to include a longer time period of steady-state savings and a present value analysis. We conducted our review between December 1996 and June 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Armed Services and the House Committee on National Security. We will make copies available to others on request. Please contact me on (202) 512-8412 if you or your staff have any questions about this report. Major contributors to this report were George Jahnigen, Kevin Perkins, and David Epstein. Improved contracting methodology and process: Improves contracting efficiency by emphasizing corporate contracting and reduced acquisition lead times. Deletion of inactive items: Deletes from DOD's catalog items for which no current applications have been identified, thereby reducing item management costs. Catalog total quality management: Corrects catalog data, which will facilitate correct requirements computations and decisions to repair or procure. Improved demilitarization: Corrects coding errors dealing with demilitarization responsibilities and facilitates timely disposal of excess material. Improved stock positioning: Uses better data on requisitioner locations to reposition stock and decreases shipping and storage costs and response time. Item reduction and entry control: Reviews items during weapon system design phase to identify all equivalent items, leading to reductions in items to be managed and inventory investments. Secondary-item provisioning on end-item contracts: Establishes a DOD program to deal with provisioning line items with end items, thereby reducing procurements and potentially reducing prices as administrative costs are reduced. Source breakout: Strengthens DLA's program to identify subcontractors and other less costly sources of supply. Workloading of depot maintenance: Provides maintenance depots with better reparable parts induction scheduling, resulting in reduced inventories. Integration of initial and replenishment requirements: Integrates requirements procedures used by program managers to combine computation of initial inventory and replenishment levels. Single set of ICP policies and procedures: Eliminates current duplication of policies and procedures among the services and DLA for secondary items, thereby generating personnel savings. Integration of wholesale and retail requirements: Reduces wholesale and retail inventory investment by using procedures that integrate wholesale and retail responsiveness and inventory costs. Reduction of service-unique catalog data: Eliminates unique service management codes, thus reducing costs associated with data management. Single design activity for materiel management system: Combines into one DLA activity the activities of service design agencies that develop and maintain service-unique software for managing secondary items. Single ICP managing items on a weapon system: Realigns item management along weapon system lines, eliminating file duplication and facilitating computations using weapon system readiness goals. Uniform credit policy for returns: Establishes a single policy for giving credit to organizations returning materiel, thereby simplifying budgeting and accounting at customer levels and industrial fund accounting. Consolidation of selective ICP functions at a single site within a region. One wholesale manager for a common-use reparable item (or for similar common use reparable items). Electronic networking and tasking to link ICPs and provide for a mechanism for executing partnership (intra- or inter-component). Reduction of each DOD component's ICPs (e.g., 1 ICP per service and 1 or 2 ICPs for DLA). Single management element Assignment of ICP management to all services, except the Marine Corps, along weapon system lines (e.g., Air Force - aircraft, Navy - ships, and Army - ground equipment). Management of all DOD ICPs under DLA. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. 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GAO reviewed the Office of the Secretary of Defense's (OSD) report on its review of the Defense Logistics Agency's (DLA) management of all Department of Defense (DOD) inventory control points (ICP). GAO noted that: (1) OSD used conservative assumptions and cost factors in estimating cost savings from consolidating service ICPs under DLA; (2) its projected cost savings of $2.2 billion to $3.8 billion cover a 13-year period, fiscal years 1998 to 2010; (3) GAO believes this approach to be reasonable, given the sensitive nature of the issue, the limited amount of time to perform the review, and the data available; (4) however, the projected cost savings estimates would be at least $1.3 billion to $2.3 billion greater if OSD used base realignment and closure principles, such as estimating steady-state savings over a longer time period and a present value analysis instead of a constant dollar analysis; and (5) the potential savings would likely be greater yet if the analysis included: (a) savings from all business process improvements related to the consolidation; and (b) planned future improvements to DOD's existing material management information systems.

The Army's modular force transformation affected the Army's combat units and the related command and support organizations in both the active and reserve components. The Army's objective in redesigning its force structure was to create more units to meet operational needs and be more flexible in deploying independently while maintaining combat capabilities of division-based brigades. According to the Army, having more combat brigades with specialized equipment and specialist personnel would increase combat capability and add value for combatant commanders. To increase the flexibility of units, the Army standardized brigade combat teams in one of three designs--armored brigade, infantry brigade, or Stryker brigade (see fig. 1). The Army's new modular units were designed, equipped, and staffed differently than the units they replaced, and thus the transformation required many changes, such as new equipment and facilities, a different mix of skills and occupational specialties among Army personnel, and significant changes to training and doctrine. A key change was the reduction in the number of maneuver battalions within the modular units from three battalions per brigade under the division-based organization to two battalions for most brigade combat teams. Critics of the decision to have only two battalions raised concerns about whether the new structure would maintain as much combat capability as the division-based battalion. However, the Army expected to increase the modular brigade combat teams' capability through specialized equipment and personnel, called "key enablers." Since 2004, when the Army introduced its modular restructuring initiative, the Army has made multiple adjustments to its original plans for restructuring its operational force. The Army's initial restructuring plan called for 77 modular brigade combat teams--43 active-duty brigade combat teams and 34 National Guard brigades. As of fiscal year 2013, the Army had 71 brigade combat teams, consisting of 43 active-duty brigade combat teams and 28 National Guard brigades. In 2013, the Army announced plans for another change in the structure of the modular force related to the need to reduce the active-duty component from 570,000 to 490,000 soldiers by fiscal year 2015. As figure 2 shows, the Army plans to reduce the number of active-duty brigade combat teams from a high of 45 teams to 32 teams by fiscal year 2015. The number of National Guard brigades would remain at 28, bringing the total of brigade combat teams to 60. In addition to the reduction in the numbers of brigade combat teams, the Army plans to refine the designs of the remaining brigades to add engineering and artillery capabilities, as well as increase the number of maneuver battalions from two to three for most brigade combat teams. According to the Army, the modifications to the modular force would enable it to preserve operational capability and flexibility, while reducing the number of soldiers in the active-duty component. Our body of work on the Army's modular force transformation includes seven reports and three testimonies. The related work is listed at the end of this report. Based on our work, we made several recommendations to the Secretary of Defense and to the Army intended to improve the information on the Army's transition to a modular design that the Army provided to decision makers in Congress. Because of the magnitude of the Army's transformation plans and concerns about their affordability, we initially conducted work under the Comptroller General's statutory authority and examined both the force structure and cost implications of the Army's transformation into a modular force. Subsequently, Congress enacted requirements that the Army submit an annual report on its progress on its modular force transformation and that we review the Army's report. According to the Army, the transition to the modular force structure, which began in 2004, was completed by the end of fiscal year 2013. The National Defense Authorization Act for Fiscal Year 2014 repealed the requirement for the Army and GAO to prepare annual reports about the Army's modular force restructuring. The Army's annual report on its modular force generally met legislative requirements by providing information that either fully or partially addressed each of the requirements. Our analysis showed that of the 14 legislative requirements, the report fully addressed 9 and partially addressed 5. The fully addressed requirements included information related to the status of key enabler personnel and equipment, an assessment of the modular force capabilities, and the status of doctrine for the modular force, among others. The partially addressed requirements included risks associated with shortfalls; mitigation strategies for shortfalls; scheduling for repairing, recapitalizing, and replacing equipment; itemizing information by active-duty and reserve components; and comments by the National Guard and Army Reserve regarding key enabler personnel and equipment. By fully or partially addressing the requirements, the Army's 2013 report provided more thorough information to congressional decision makers on the Army's progress in its modular force transformation than previous reports. Army officials gave several reasons why the report did not fully address some of these requirements. For example, the Army's report discussed mitigation strategies for personnel shortfalls but not for all equipment shortfalls. According to Army officials, the Army mitigated risk by providing equipment to the next deploying units. In other cases, the Army chose not to mitigate equipment shortfalls due to the costs involved or because the specific equipment item no longer met the needs of the modular force. Additionally, the Army did not fully report on a schedule for the repair of equipment because, according to Army officials, the number of battle losses and the related amount of wear and tear on equipment returning from overseas operations was unpredictable. However, the Army provided some general information about its repair schedule for fiscal years 2013 and 2014, such as when the Army expects to begin addressing postcombat equipment repairs. In addition, according to officials the report did not itemize information by component because the report included a separate section with comments from the reserve components. However, the comments by the reserve components did not include all required information, such as identifying risks and mitigation strategies associated with equipment shortfalls. Table 1 summarizes our assessment of the extent to which the Army's annual modular force report included each of the legislative requirements. The Individual Ready Reserve is a subcategory of the Ready Reserve of the Army Reserve. Members of the Individual Ready Reserve include individuals who were previously trained during periods of active service, but have not completed their service obligations; individuals who have completed their service obligation and voluntarily retain their reserve status; and personnel who have not completed basic training. Most of these members are not assigned to organized units, do not attend weekend or annual training, and do not receive pay unless they are called to active duty. reported that Army officials responsible for providing information on the modular force progress were not given sufficient guidance to ensure the completeness of its report. We recommended that the Army provide guidance on the level and type of detail needed for each office within the Army responsible for providing information on the Army's progress in meeting modularity requirements. In preparing the fiscal year 2013 report, the Army implemented our recommendation to provide guidance to Army officials to ensure the completeness of its report. The Director of the Army Staff sent a memorandum in March 2013 to Army staff that outlined the coordination process for preparing the fiscal year 2013 report, identifying each office responsible for providing information for the report. In addition, Army officials coordinating the report held meetings with each office early in the process to ensure they complied with the mandated language. Additionally, the Army provided the offices with a list of the key enabler items to report on rather than letting the offices interpret what to report. By implementing our recommendation, the Army's fiscal year 2013 modularity report generally met legislative requirements and provided congressional decision makers with additional information on the Army's progress in its modular force restructuring. The Army has completed its transition to modular brigade combat team designs, but it has not addressed the key challenges of creating a results- oriented plan, creating realistic cost estimates, and planning comprehensive assessments that we identified in our work since 2005. In our prior reports between 2005 and 2008 on the Army's modular transformation, we made 20 recommendations intended to help the Army address these challenges. The Army generally agreed with 18 of those recommendations, but it has so far implemented only 3 of them. The Army has begun to create a results-oriented plan, but more work remains to create realistic cost estimates and plan comprehensive assessments. As the Army continues to make changes to the structure of its modular brigade combat team--including adding a maneuver battalion to the infantry and armored brigade combat teams--it has the opportunity to incorporate lessons learned and reduce the risk of repeating mistakes from its recent experience in changing its force structure. In order to improve the Army's focus on the relationship between key enabler investments and results and the completeness of the information that the Army provides Congress, between 2005 and 2008 we made four recommendations regarding creating a results-oriented plan. Our recommendations were rooted in key practices that we have identified for assisting organizational transformations, suggesting agencies can be more results-oriented by focusing on a key set of principles and priorities at the outset of the transformation as well as setting implementation goals to show progress from the beginning of the transformation. Our recommendations to the Army included developing a plan to identify authorized and projected personnel and equipment levels as well as an assessment of the risks associated with any shortfalls. The Army generally agreed with three of the recommendations and ultimately implemented two of them. For example, the Army concurred with but did not implement our 2006 recommendation to provide the Secretary of Defense and Congress with details about the Army's equipping strategy; when we reiterated a similar recommendation in 2008, the Army implemented it by providing more detailed information on its progress in providing the modular force with key personnel and equipment enablers. For a full list of our past recommendations and their implementation status regarding creating a results-oriented plan for the Army's modular force transformation, see appendix II. Our work since 2005 found that the Army began its modular transition without creating a results-oriented plan with clear milestones to provide units with specially trained personnel and specialized equipment. In 2005 and 2006, we reported that the Army began its modular transformation without creating a staffing plan that considered the size and composition of the modular force. For example, in 2005 we testified that the Army had begun its modular transformation without deciding on the number of brigade combat teams or finalizing the design of supporting units. Without finalized designs or key decisions, the Army did not have a complete understanding of the personnel needed to achieve its goals. As a result, the Army could not assure decision makers when modular units would have the required key enabler staff in place to restore readiness, and it experienced cost growth and timeline slippage in its efforts to transform to a modular and more capable force. In 2006, we testified and reported that the Army did not plan to fill some key intelligence positions required by its new modular force structure. Without continued and significant progress in meeting personnel requirements, the Army had to accept increased risk in its ability to support its combat forces, and it ultimately sought support for an increase in overall personnel from the Department of Defense (DOD) and Congress. Additionally, in 2005 and 2006 we reported that the Army did not develop an equipping plan to provide modular units the required quantities of key enabler equipment considered critical for the transformation. For example, in 2005 we testified that although the Army had some of its key enabler equipment on hand at the start of its modular transformation, the amount of equipment provided to brigade combat teams was well below the levels tested by the Army Training and Doctrine Command. As a result, officials from two divisions that we visited expressed concern over their soldiers' ability to train and become proficient with some of this high- tech equipment because the equipment was not available in sufficient numbers. In 2006, we similarly testified that although active modular combat brigades were receiving considerable quantities of equipment, they initially lacked required quantities of items such as communications systems that were key for providing the enhanced intelligence, situational awareness, and network capabilities needed to help match the combat power of the Army's former brigade structure. At that time, the Army's modular combat brigade conversion schedule outpaced the planned acquisition or funding for some equipment requirements, and the Army had not defined specific equipping plans for brigades. By not completing development of its equipping strategy, the Secretary of Defense and Congress were not in a good position to assess the Army's equipment requirements and the level of risk associated with the Army's plans. Moreover, in 2008 we reported that although the Army had established over 80 percent of its modular units, it did not have a results-oriented plan with clear milestones in place to guide efforts to staff and equip those new units. The Army extended its estimates of how long it would take to equip the modular force from 2011 to 2019, but it provided few details about interim steps. While the Army projected that it would have enough personnel and equipment in the aggregate, its projections relied on uncertain assumptions related to meeting recruiting and retention goals as well as restoring equipment used in current operations. For example, the Army centered its equipping strategy on the Future Combat System, a longer-term transformation effort that comprised 14 integrated weapon systems and an advanced information network. The Army expected brigade combat teams equipped with the Future Combat System to provide significant warfighting capabilities to DOD's overall joint military operations. However, in 2009, after 6 years and an estimated $18 billion invested, DOD canceled the Future Combat System acquisition program and instead identified alternate plans to modernize equipment. The cancelation of the Future Combat System presented setbacks to the equipping of the modular force. Without a results-oriented plan for equipment and staffing with realistic milestones, the Army could not assure decision makers when modular units would have the required equipment and staff in place to restore readiness. In 2013, when the Army announced plans to change its modular force designs and add a third battalion to most brigade combat teams, it incorporated some lessons we identified in our prior work and took some initial steps to create a results-oriented plan to guide implementation of the changes. The Army based decisions on which units to inactivate on quantitative and qualitative analyses and developed a timeline for the changes, with associated tasks and milestones. For example, as we reported in December 2013, the Army established a planning team for the brigade combat team reorganization to assess factors such as strategic considerations, military construction costs, and proximity to embarkation points, among others, and to develop stationing options for decision makers. Furthermore, the Army has developed a plan to reduce risk to the readiness of the force during this reorganization by providing equipment, personnel, and training resources to units currently deployed or deploying for operations or contingencies and then to seven brigade combat teams that will maintain a high level of readiness for 18 to 24 months. According to Army officials, these seven teams will remain at the highest level of readiness in order to support any planned or unexpected operations while the remaining brigade combat teams undergo their reorganizations and accept a risk of low readiness to respond to potential contingencies. Moreover, the Army Structure memorandum for 2015 through 2019 documented interim steps in reorganizing the Army modular force structure. For example, the Army identified inactivation and reorganization dates as well as changes to the tables of equipment for the brigade combat teams. Additionally, once the Army identified which units would be inactivated or reorganized, officials developed an online tracking system that provides information such as when the reorganization and associated training will occur and what tasks each reorganized unit will have to complete. According to an Army official, senior leaders--including three-star generals and the Chief of Staff of the Army--reviewed the online system to track progress in implementing planned changes. However, the Army has not always been able to implement its plans to achieve its goals. For example, the Army was not able to fulfill plans for some key enabler equipment such as through its Future Combat System program that were deemed critical to achieving the combat effectiveness of the modular brigade combat teams. The Army could face risks in implementing current plans without sustaining attention and following through on its plans for changes to the modular force design. By creating a results-oriented plan for the inactivations and reorganizations, the Army has established a baseline against which to measure performance. If the Army follows through its initial steps to create a results-oriented plan for changes to the modular force design, it would help to provide senior officials and Congress the ability to identify and mitigate any potential problems that may arise. In order to improve information available to decision makers on the cost of the Army's plan for its modular force transformation, between 2005 and 2008 we made 10 recommendations regarding creating a realistic cost estimate. In the John Warner National Defense Authorization Act for Fiscal Year 2007, Congress specifically required the Army to report on a complete itemization of the amount of funds expended to date on the modular brigades and itemization of the requirements for the funding priorities. Our recommendations to the Army included submitting an annual cost plan that incorporated a clear definition of the costs the Army considered to be related to the modular transformation, estimates for equipment and personnel, and divergences from the plan as stated in the prior year's report, among others. The Army generally agreed with all the recommendations, but it did not implement any of them. For example, the Army did not develop a plan for overseeing the costs related to the Army's transformation to a modular force as we had recommended, stating that the administrative costs of such an effort would outweigh any benefit. For a full list of our past recommendations and their implementation status regarding creating realistic cost estimates for the Army's modular force transformation, see appendix II. From 2005 through 2013, the Army did not create realistic cost estimates for implementing its modular force transformation. We reported in 2005 that the Army might not have estimated all potential costs for its modular force transformation because it had not made decisions related to force design, equipment, facilities, and personnel. We reported that the Army likely understated its estimates for equipment costs because it did not entirely reflect the cost of purchasing all the equipment needed to bring the planned units to the modular design--and therefore to the level of capability--that the Army validated in testing. In addition, Army officials were uncertain whether the personnel authorization was enough to support the modular transformation, putting costs at risk of increasing if the Army determined that the transformation required additional personnel. Additionally, the Army was uncertain of the costs of constructing permanent facilities because it did not incorporate proposals for base realignment and closure and restationing of personnel from overseas. As costs grew due to these uncertainties, the Army required additional funding or needed to accept reduced capabilities among some or all of its units. By not developing a better understanding of costs associated with the modular force and a clearer picture of the effect of resource decisions on the modular force capability, DOD was not well positioned to weigh competing priorities or to provide congressional decision makers the information they needed to evaluate funding requests. Additionally, in 2007 we reported that Army officials did not identify how much additional funding they needed to fully equip modular units but they planned to request funds for additional equipment needs through DOD's annual budget process. We noted that in the absence of a complete cost estimate, the Army would not be in a good position to identify detailed costs and provide transparency to Congress of its total funding needs. We also reported that the Army sought multiple sources of money without linking funding to its modular unit design requirements, thus complicating decision makers' ability to assess the Army's progress in fully equipping the modular force. In 2007, we reported that the Army estimated the modular restructuring could cost $52.5 billion--more than two-and-a-half times greater than its initial cost estimate of $20 billion in 2004. In 2009, the Army reported to Congress that it could no longer itemize modular costs because all Army personnel and equipment budgets support the modular force. Without linking funding to requirements, decision makers would have difficulty assessing the Army's progress in meeting its goals, knowing what resources would be required to equip and staff modular units, and balancing funding requests for these initiatives with other competing priorities. As the Army continues planning for changes to its modular force design, Army officials compiling the fiscal year 2013 report were not aware of any cost estimates developed for inactivating 12 brigade combat teams and adding a third battalion to the infantry and armored brigade combat teams. According to Army officials, the Army expects that the costs will be low because 9 of the 12 inactivations would involve reorganizations within the same installation, minimizing military construction and personnel relocation costs. However, the Army did not provide us with any detailed cost analysis. Further, the Army did not provide cost estimates for military construction and personnel relocation costs for those reorganizations occurring across installations or for associated doctrine development or training for the reorganized units. Without realistic cost estimates, the Army may encounter many of the same risks that we reported previously. The Army plans to reduce its budget by $170 billion between fiscal years 2013 and 2022, and the reorganization of the brigade combat teams and the associated reduction of 80,000 personnel should contribute to the cost savings. However, given two decades of GAO reports delineating DOD's overly optimistic planning assumptions in budget formulation, which often lead to costly program delays, we believe that not having a detailed cost analysis could lead to increases in the Army's incremental costs for its reorganization. Specifically, if costs grow due to uncertainties regarding equipment and personnel movement costs, the Army may require additional funding or need to accept reduced capabilities among some or all of its units. In the absence of a complete cost estimate, the Army may be unable to assure Congress that the Army has identified the total funding needs for reorganizing modular forces. We continue to believe that realistic cost estimates would enhance DOD decision makers' ability to weigh competing priorities in a fiscally constrained environment and provide Congress with the information needed to evaluate funding requests. In order to assess the implications of changes to the Army force structure in terms of the goals of modular restructuring, from 2005 through 2008 we made six recommendations regarding creating comprehensive assessment plans. Standards for Internal Control in the Federal Government state that agencies should provide reasonable assurance to decision makers that their objectives are being achieved and that decision makers should have reliable data to determine whether they are meeting goals and using resources effectively and efficiently. Our recommendations to the Army included developing a comprehensive plan for assessing the Army's progress toward achieving the benefits of the modular transformation that incorporated quantifiable metrics and addressed a wide range of both traditional and irregular security challenges. The Army generally agreed with five of the recommendations but implemented only one. For example, the Army agreed with but did not implement our recommendation to develop a comprehensive assessment plan that includes steps to evaluate modular units in full-spectrum combat. However, the Army acted upon our recommendation by assessing aspects of the modular force and refining its modular designs based on lessons learned in the areas of equipment, doctrine, and training. For a full list of our past recommendations and their implementation status regarding completing a comprehensive assessment plan for the Army's modular force transformation, see appendix II. Since 2004, the Army has made many refinements to its modular design based on lessons learned and limited assessments of specific capabilities, but it has not completed a comprehensive assessment plan to measure the extent that its modular force transformation is meeting performance goals. In 2006, we reported that the Army did not have a comprehensive and transparent approach to measure progress against stated modularity objectives, assess the need for further changes to modular designs, and monitor implementation plans. While DOD had identified the importance of establishing objectives that translate into measurable metrics that in turn provide accountability for results, the Army had not established outcome-related metrics linked to most of its modularity objectives. Further, we reported that although the Army analyzed lessons learned from Iraq and training events, the Army did not have a long-term comprehensive plan for further analysis and testing of its modular combat brigade designs and fielded capabilities. As a result, decision makers did not have sufficient information to assess the capabilities, cost, and risks of the Army's modular force implementation plans. Moreover, in 2007 we reported that the Army was evaluating and applying lessons learned from its counterinsurgency operations. However, it did not have a comprehensive assessment plan to determine whether fielded modular unit designs met the Army's original goals for modular units across the full spectrum of low- and high-intensity warfare, and it did not have outcome-oriented metrics that helped to measure progress in achieving the goals of the modular force. The Army evaluated the experiences of modular units deployed to Iraq and Afghanistan and had made some changes in unit designs based on these lessons; however, the Army did not develop a plan for assessing modular units in high- intensity combat operations. In seeking approval to establish modular units, the Army identified a number of planned benefits associated with them, such as providing the same or better combat effectiveness of the Army's division-based brigades. However, the Army limited its evaluations to the performance of modular units during predeployment exercises and counterinsurgency operations and did not evaluate their performance across the full spectrum of combat operations that include large-scale, high-intensity combat operations. As a result, the Army did not have a clear way to measure the extent to which new modular brigades were as effective as its division-based brigades for a range of missions. Without a comprehensive assessment plan that included a wider range of potential missions, the Army may have missed opportunities to strengthen its designs. Additionally, we reported in our 2008 report on Army modularity that the Army tested its units with the full complement of required equipment and personnel, and not at the somewhat lower level of personnel and equipment the Army actually provided to units. As a result, the Army assessment of whether the capabilities that it was fielding could perform mission requirements did not capture realistic missions and outcomes. Without an analysis of the capabilities of the modular force at realistic personnel and equipment levels, the Army was not in a position to assess whether the capabilities that it was fielding could perform mission requirements. Faced with decreasing financial resources and increasing ambiguity regarding future missions, decision makers sought to determine how to organize combat formations to best position the Army for a range of possible missions. The Army Training and Doctrine Command Analysis Center prepared an analysis in May 2012 to consider whether the Army should add a third maneuver battalion to the armored and infantry brigade combat team designs. To begin this analysis, the Army assembled 23 commanders of brigade combat teams to gather insights into the effectiveness of the both the two- and three-battalion designs across a wide range of possible future demands, such as major combat operations, low-threat activities, and enhanced protective posture. In doing so, the Army considered several factors we reported on in our prior work, including reviewing the full spectrum of low- and high-intensity warfare and identifying assessment metrics such as security of vehicles. However, the analysis was not an assessment of the Army's prior performance under a two-battalion construct. Rather, the analysis was a projection of how to organize the Army for future demands and thus did not meet the intent of our past recommendations. The Army has developed some plans to conduct assessments and capture lessons learned as it changes its modular force design, but it has not formalized these plans with a detailed methodology, data-collection procedures, or outcome-based metrics. According to Army officials, the Army plans to conduct assessments and capture lessons learned during the reorganization of the brigade combat teams. The Army issued an execution order for the Army Training and Doctrine Command to conduct assessments for this reorganization. According to a senior official from the Army Training and Doctrine Command, the Army plans to collect baseline metrics on the brigades both prior to and following their reorganization. Additionally, the Army has developed new mission- essential task lists for the infantry, Stryker, and armored brigade combat teams on which to base assessments. When the brigade combat teams participate in training exercises in their new organizational designs, assessors will evaluate how well the teams achieve their mission- essential tasks. The assessors can then adjust the training if the brigade combat teams are having difficulties understanding the new tasks. However, the Army officials stated that there is no checklist or detailed plan on how to conduct these assessments or what outputs to measure. Moreover, according to Army officials, the assessments are dependent upon receiving sufficient funding and potentially may not occur. If the Army created a comprehensive assessment plan, it could help enable the Army to clearly measure the extent to which it is achieving desired benefits in the design of its modular force. We are not making new recommendations in this report. However, this report's analysis provides additional support for past recommendations to develop realistic cost estimates and to create a comprehensive assessment plan to measure achievement of desired benefits. We provided a draft of this report to DOD for comment. Army officials provided oral comments on the draft indicating that DOD concurred with our report. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; and the Secretary of the Army. The report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (404) 679-1816 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To determine the extent that the Army addressed legislative requirements to report information regarding key equipment and personnel needs for its reorganized modular force, three analysts independently reviewed the Army's fiscal year 2013 modularity report and compared the report to the legislative requirements. A fourth analyst adjudicated the differences in cases of dispute and determined a final categorization. The analysts used an evaluation tool that listed the legislative requirements and categorized the extent to which the Army's report included information required for each reporting element from the mandate. The categories were "Addressed," "Addressed in part," and "Not addressed." "Addressed" meant the report thoroughly addressed all components of the requirement. "Addressed in part" meant that one or more, but not all, components of the requirement were addressed, or that all components of the requirement were addressed, but the information provided was insufficient to answer the requirement fully due to limitations in the data or information provided. "Not addressed" meant that the report did not address any part of the requirement. To gain a full understanding of the method and data the Army used to prepare the report, clarify the significance of the information presented in the report, and obtain additional information that addressed the legislative reporting requirements, we met with Army officials knowledgeable about compiling information for the report, about key enabler personnel and equipment, and about equipment reset, doctrine, and force structure changes. Specifically we met with Army officials from the Offices of the Deputy Chiefs of Staff for Personnel (G-1), Logistics (G-4), Operations and Plans (G-3/5/7), and Programs (G-8); Training and Doctrine Command; Army National Guard; and Army Reserve who provided data for the Army's fiscal year 2013 modularity report. To gain a full understanding of the data the Army used to prepare the report, analysts reviewed documents the Army used to compile the report, including a Director of the Army Staff memorandum, the list of key enabler personnel and equipment required to be included in the report, and the Army Equipment Reset Update. To gain a full understanding of the progress made in fulfilling modularity requirements in the fiscal year 2013 report, we reviewed the fiscal year 2012 report to determine the extent of progress made between fiscal years 2012 and 2013. After the initial interview, document review, and completion of the evaluation tool and adjudication of the differences, the analysts determined that of the 14 legislative requirements, 9 were addressed and 5 were addressed in part. Analysts conducted a follow-up interview regarding the five legislative requirements that were addressed in part to obtain additional information or documentation on why the elements were not fully addressed. To identify challenges in the Army's modular force restructuring over the past 10 years, we reviewed prior GAO reports evaluating the Army force structure. We also reviewed prior GAO reports evaluating technology and equipment related to the Army's modular restructuring to identify challenges. From our review of prior reports, we identified three main challenges the Army faced during its modular force restructuring. To determine how the Army is addressing these challenges, we reviewed whether the Army implemented the recommendations in our prior GAO reports that evaluated the Army's modular force structure. To determine whether the Army plans in its modular force structure reorganization to address challenges previously identified in our reports, we reviewed Army documents and interviewed Army officials. We reviewed documents including the Brigade Combat Team inactivation execution order, Army Structure Memorandum for fiscal years 2014 to 2019, Army of 2020 Analysis Supporting the Brigade Combat Team Design Decision, and the Army Campaign Plan portal, which the Army uses to track the reorganization. We met with officials knowledgeable about the changes to the brigade combat team designs to gain a full understanding of the plans the Army is developing to execute the changes. We also spoke with an official from the Army Training and Doctrine Command to learn about the Army's plans to conduct comprehensive assessments of its modular force reorganization. We conducted this performance audit from September 2013 to April 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This appendix presents a list of (1) the 20 recommendations that we had previously made regarding the Army's modular force transformation, (2) the Department of Defense (DOD) response to those recommendations, and (3) our analysis of whether the Army has addressed the issues that gave rise to the recommendations. From 2005 to 2008, we made 20 recommendations regarding the Army's modular force transformation in the following four reports: Force Structure: Actions Needed to Improve Estimates and Oversight of Costs for Transforming Army to a Modular Force. GAO-05-926. Washington, D.C.: September 29, 2005. (Referred to below as September 2005 recommendations). Force Structure: Army Needs to Provide DOD and Congress More Visibility Regarding Modular Force Capabilities and Implementation Plans. GAO-06-745. Washington, D.C.: September 6, 2006. (Referred to below as September 2006 recommendations). Force Structure: Better Management Controls Are Needed to Oversee the Army's Modular Force and Expansion Initiatives and Improve Accountability for Results. GAO-08-145. Washington, D.C.: December 14, 2007. (Referred to below as December 2007 recommendations). Force Structure: The Army Needs a Results-Oriented Plan to Equip and Staff Modular Forces and a Thorough Assessment of Their Capabilities. GAO-09-131. Washington, D.C.: November 14, 2008. (Referred to below as November 2008 recommendations). We tracked the recommendations for 4 years following each report's publication and closed each one as either implemented or not implemented. We grouped our recommendations by the types of issues and challenges on which the recommendations focused: (1) creating a results-oriented plan, (2) developing realistic cost estimates, and (3) planning comprehensive assessments. The appendix lists the recommendations by these three key challenges. In addition to the contact named above, Margaret Morgan (Assistant Director), Alice Paszel, Richard Powelson, Kelly Rubin, Jodie Sandel, Amie Steele, and Sabrina Streagle made significant contributions to this report. Force Structure: Army's Annual Report on Modularity Progress Needs More Complete and Clear Information to Aid Decision Makers. GAO-13-183R. Washington, D.C.: January 16, 2013. Force Structure: Assessment of Army Report on Fiscal Year 2011 Progress in Modular Restructuring. GAO-12-527R. Washington, D.C.: March 26, 2012. Force Structure: Assessment of Army Progress in Modular Restructuring, Prepositioned Equipment, and Equipment Reset. GAO-10-507R. Washington, D.C.: April 26, 2010. Force Structure: The Army Needs a Results-Oriented Plan to Equip and Staff Modular Forces and a Thorough Assessment of Their Capabilities. GAO-09-131. Washington, D.C.: November 14, 2008. Force Structure: Restructuring and Rebuilding the Army Will Cost Billions of Dollars for Equipment but the Total Cost Is Uncertain. GAO-08-669T. Washington, D.C.: April 10, 2008. Force Structure: Better Management Controls Are Needed to Oversee the Army's Modular Force and Expansion Initiatives and Improve Accountability for Results. GAO-08-145. Washington, D.C.: December 14, 2007. Force Structure: Army Needs to Provide DOD and Congress More Visibility Regarding Modular Force Capabilities and Implementation Plans. GAO-06-745. Washington, D.C.: September 6, 2006. Force Structure: Capabilities and Cost of Army Modular Force Remain Uncertain. GAO-06-548T. Washington, D.C.: April 4, 2006. Force Structure: Actions Needed to Improve Estimates and Oversight of Costs for Transforming Army to a Modular Force. GAO-05-926. Washington, D.C.: September 29, 2005. Force Structure: Preliminary Observations on Army Plans to Implement and Fund Modular Forces. GAO-05-443T. Washington, D.C.: March 16, 2005.

The Army considers its modular force transformation, which began in 2004, to be its most extensive restructuring since World War II. The Army expanded the number of deployable units and incorporated advanced equipment and specialized personnel, but removed a maneuver battalion from its brigades. Throughout the transformation, GAO reported, testified, and made recommendations on associated challenges the Army faced. In 2013, the Army stated it had completed its transformation and submitted its last required report to Congress on its modular progress. It also announced plans to restore a maneuver battalion to most brigades. Congress mandated that GAO report annually on the Army's modular force. For this report, GAO (1) evaluates whether the Army addressed the legislative requirements in its modular force report and (2) provides an overview of any challenges that the Army faced in its modular force transformation and describes how the Army is addressing these challenges as it implements further changes in its force structure. GAO analyzed the Army's report against the legislative requirements, reviewed key Army reports, and spoke to Army officials. The Army's annual report on its modular force either fully or partially addressed all of the requirements mandated by law. GAO's analysis showed that of the 14 legislative requirements, the report fully addressed 9 and partially addressed 5. The requirements that were fully addressed included an assessment of the modular force capabilities and the status of doctrine for the modular force, among others. Some of the requirements that were partially addressed included information related to risks and mitigation strategies associated with shortfalls; scheduling for repairing, recapitalizing, and replacing equipment; and itemizing information by active-duty and reserve components. The 2013 report provided more thorough information to congressional decision makers on the Army's progress in its modular force transformation than previous reports. GAO's body of work since 2005 on the Army's modular restructuring found that the Army faced challenges in creating a results-oriented plan, developing realistic cost estimates, and planning comprehensive assessments. GAO made 20 recommendations from 2005 through 2008 to help address these challenges; the Army generally agreed with 18 of the recommendations but so far has implemented only 3. As the Army plans to restructure its modular force it has made some progress in creating a results-oriented plan, but more work remains in developing realistic cost estimates and planning comprehensive assessments. Creating a results-oriented plan. As the Army plans further changes to its modular force design, it has taken initial steps to create a results-oriented plan by developing a timeline with associated tasks and milestones. When the Army began its modular force transformation it did not create a plan with clear milestones to guide its efforts to fully staff and equip the modular force. By incorporating lessons identified in GAO's prior work as it makes further changes, the Army has established a baseline against which to measure performance and may provide decision makers the ability to mitigate any potential problems that may arise. Developing realistic cost estimates . From 2005 through 2013, the Army did not create realistic cost estimates or provide a reliable accounting of past spending or future funding needs for implementing its modular force transformation. As the Army plans further changes to its modular force design, it has not developed cost estimates for military construction, personnel relocation, or training for the reorganized units. GAO continues to believe that realistic cost estimates would better position the Army to weigh competing priorities in a fiscally constrained environment and provide Congress with the information needed to evaluate funding requests. Planning comprehensive assessments. Since 2004, the Army has made many changes to its modular design based on limited assessments, but it has not completed a comprehensive assessment plan to measure the extent that its modular force transformation is meeting performance goals. As the Army continues to make changes to its modular design, the Army plans to conduct assessments but has not identified outcome-oriented metrics to measure progress. If the Army created a comprehensive assessment plan, it could help decision makers identify capability gaps and mitigate risks. GAO is not making new recommendations, but this analysis provides additional support for past recommendations to develop realistic cost estimates and to create a comprehensive assessment plan to measure achievement of desired benefits. In oral comments on a draft of this report, the Army concurred with the report.

The federal government encourages federal prime contractors' use of small businesses as subcontractors by requiring prime contractors to develop plans with stated goals for subcontracting to various types of small businesses. Federal regulations require a subcontracting plan for each contract or contract modification that exceeds $500,000 ($1 million for construction contracts) and has subcontracting possibilities. The Subcontracting Assistance Program is SBA's vehicle for increasing the percentage of subcontract awards to small businesses and ensuring that small businesses have the maximum practicable opportunity to participate in the performance of federal government contracts. SBA's Office of Government Contracting (OGC) oversees this program. SBA/OGC has six Area Offices responsible for all prime contractors' subcontracting performance. The program is implemented by CMRs, who promote small business subcontracting in two primary ways, as described in SBA regulations.First, CMRs review prime contractors' compliance with the requirements of their subcontracting plans. They conduct on-site compliance reviews at prime contractors' facilities and validate how well the prime contractors are implementing their subcontracting plans. They also conduct "desk reviews," which are reviews of relevant subcontracting reports that are submitted by prime contractors and completed without on-site visits. Second, CMRs conduct various marketing activities, such as marketing small businesses to prime contractors or matching certain types of small business subcontractors with prime contractors. CMRs perform this "matchmaking" through both personal introductions and the use of Web- based tools that help to connect prime contractors and subcontractors. CMRs also provide various educational activities (e.g., seminars and workshops) for prime contractors, subcontractors, and agency officials as part of their marketing activities. In describing the duties required of CMRs, SBA regulations do not place a relative order of importance on any of these responsibilities. In addition, CMRs work on various SBA special initiatives as part of their marketing activities. For example, CMRs promote SBA's special 8(a) subcontracting initiative, which focuses on increasing the number of subcontracts to small disadvantaged businesses. CMRs also promote several special initiatives involving SBA's Procurement Marketing and Access Network (PRO-Net). PRO-Net is a Web-based system that allows prime contractors to advertise potential subcontracting opportunities and small businesses to advertise their capabilities as subcontractors. CMRs install PRO-Net access stations at large prime contractor sites and public libraries, and train interested businesses and agencies in the use of PRO- Net to match prime contractors and subcontractors. Finally, CMRs conduct special training for agencies and contractors on SBA's historically underutilized business zones (HUB-Zone) Empowerment Contracting Program, which encourages economic development in HUB Zones. SBA/OGC also employs other contract specialists, who focus on small businesses as prime contractors rather than subcontractors. These include Procurement Center Representatives (PCRs), size determination specialists, and Certificate of Competency (COC) specialists. PCRs work with agencies to determine whether it is appropriate for acquisitions not set aside for small businesses to be set aside. Size determination specialists determine whether a small business meets existing size standards for all procurement programs for which status as a small business is required. COC specialists review a contracting officer's determination that the small business in question is not competent to perform on a particular contract. The CMR role is conflicted and in decline. Over the past few years, the CMR role has become part-time, and CMRs now usually have additional roles that often take priority. CMRs appear to spend slightly more time on marketing activities than on compliance monitoring, and they now rely much more frequently on desk reviews than on-site visits for the latter. In addition, workloads and prime contractor coverage vary greatly between CMRs. SBA officials and CMRs have several concerns about the CMR role. The CMR position is usually part-time. At the end of fiscal year 2001, about 90 percent of the CMRs had other substantial responsibilities in addition to their CMR duties. At that time, only 4 of the 39 CMRs were full-time CMRs. As figure 1 shows, the number of part-time CMRs has grown over time, increasing twelve-fold since 1992. (SBA officials anticipate the continued assignment of additional roles to CMRs and other contracting specialists.) In addition, despite the fact that a larger number of staff had CMR duties at the end of fiscal year 2001 than in fiscal 1992, the number of CMR full- time equivalents (FTEs) declined 28 percent--from 25 to about 18--during this period. The SBA officials and CMRs we interviewed told us that part-time CMRs have a variety of additional responsibilities, including serving as PCRs, COC specialists, and/or size determination specialists. For example, in our survey, 87 percent of the CMRs responding reported that in fiscal year 2000, they served in one or even two additional roles, as figure 2 shows.PCR was the most frequent additional role; 59 percent of the part-time CMRs also served as PCRs. The CMRs and SBA officials we interviewed also told us that part-time CMRs often give lower priority to their CMR work than to their PCR, COC, and/or size determination work. This is consistent with our survey--57 percent of the part-time CMR respondents reported spending 60 to 89 percent of their time in fiscal year 2000 performing non-CMR duties. Only 31 percent reported spending less than 30 percent of their time on non- CMR duties. Apparently, there are several reasons for this, including not only the workload demands of these other roles, but also the time frames within which they must be performed. Generally, these roles are tied to specific procurements, and staff performing them must meet the procurement schedule. Regulations and guidance also mandate tight time frames for certain tasks. In contrast, CMR work is generally not as time sensitive, and several CMRs who perform these other roles told us they "fit in CMR work" when they have time. CMRs generally seem to spend slightly more time on marketing than on compliance monitoring. Figure 3 and table 1 show details of how CMRs spent their time in fiscal year 2000. However, the SBA officials and CMRs we interviewed told us that the amount of time that both full- and part- time CMRs spend on the two primary CMR duties--compliance monitoring and marketing--varies considerably between Area Offices and between individual CMRs. CMRs use desk reviews far more frequently than on-site reviews to monitor prime contractors' compliance with subcontracting plans. In fiscal year 2001, 70 percent of all compliance reviews were desk reviews. Reliance on desk reviews has increased substantially since fiscal year 1992, when all compliance reviews were done on-site. Figure 4 and table 2 show more details. There is an uneven distribution of CMRs nationally and an uneven distribution of CMR workload. According to SBA, at the end of fiscal year 2001, there were about 18 CMR FTEs nationally to monitor the subcontracting activities of the 2,029 prime contractors under SBA's cognizance. Figure 5 and table 3 illustrate the wide range in CMR workload. The SBA officials and CMRs we interviewed also acknowledged wide variations in workload between individual CMRs, whether full-time or part-time, in different Area Offices or within the same Area Office. For example, in one Area Office, one CMR had 13 prime contractors to monitor, while another had 65. Both spend about 10 percent of their time as CMRs. Similarly, in another Area Office, one CMR had 120 prime contractors to monitor, while a CMR in another had only 2. Both spend about 20 percent of their time as CMRs. Not surprisingly, the uneven distribution of CMRs and CMR FTEs has contributed to wide variations in the number of on-site reviews performed annually by Area Offices. For example, one Area Office conducted 15 on- site reviews in fiscal year 2001, while others conducted 40 or more. In addition, uneven workload distribution has contributed to the existence of large blocks of un-reviewed, that is, "uncovered," prime contractors. For example, in one Area, there are no SBA reviews of any kind--on-site or desk--being done for 212 prime contractors, including all the prime contractors in one state and half of those in another. SBA officials told us that in fiscal year 2001, only 11.4 percent of the prime contractors nationwide received an on-site SBA review. CMRs and SBA officials have a range of concerns about the focus of the CMR role--particularly with regard to how CMRs should spend their time. Some believe that CMRs should concentrate more on monitoring prime contractors' compliance with their subcontracting plans. Others believe they should focus more on helping small businesses connect with prime contractors for subcontracting opportunities. There are also differences of opinion and concerns within the agency about the relative merits of the methods that CMRs use to monitor compliance as well as with the uneven distribution of the CMR workload. There are disagreements within SBA about the most appropriate focus for the CMR role, that is, the balance between compliance monitoring and marketing. The Area Directors, Supervisors, and CMRs we interviewed had different views about CMR work priorities. For example, one Area Director stated that compliance monitoring should be the first priority for CMRs and matchmaking (i.e., marketing) should be secondary. Another Area Director said that the CMR role should be a combination of compliance monitoring and matchmaking but that matchmaking should get more emphasis. In contrast, the May 2001 report of the SBA Subcontracting Task Team clearly identifies compliance monitoring as the CMRs' main function. The report concludes that over the past several years, CMRs have spent a disproportionate amount of their time on special initiatives. The report recommends that compliance reviews become the CMRs' primary focus and that less emphasis be placed on ancillary duties, such as matchmaking or special initiatives. The report even proposes a new job title for the CMR, adding that "marketing" gives the wrong impression that matchmaking is the CMR's main role. In contrast again, SBA's Web site does not mention compliance monitoring as part of the CMR role. Rather, the Web site, which is an important means of communicating with both prime contractors and small businesses, describes the CMR role as "assisting small businesses in obtaining subcontracts by marketing small businesses and matching them with large prime contractors." Concerns about the focus of the CMR role are not new. SBA's Office of the Inspector General (OIG) issued a report in October 1995 citing the need to focus CMR efforts more effectively with respect to compliance monitoring and matchmaking. SBA introduced desk reviews in fiscal year 1996 as an economy measure. Because desk reviews take place in the CMRs' offices rather than at the prime contractors' locations, CMRs do not have to travel. In addition, the desk review takes substantially less time to accomplish than does the on- site review. Consequently, relying on desk reviews saves both travel money and CMR time. SBA staff opinions differ about the relative merits of on-site versus desk reviews. Some SBA officials and many CMRs believe that on-site reviews are more effective and question the relative value of desk reviews as a means of monitoring compliance. During on-site reviews, CMRs determine if prime contractors are complying with their subcontracting plans by going to the prime contractor's location, reviewing files and documentation that support reported summaries of subcontracting activities, and interviewing officials. The CMRs we spoke with said that this type of in-depth review is one of their best tools to encourage the maximum use of small businesses as subcontractors. In contrast, other SBA officials believe that using desk reviews not only saves resources but also increases the total amount of monitoring that CMRs can do. SBA officials said they have never evaluated the effectiveness of the two types of reviews. SBA's OIG observed the uneven workload distribution problem in October 1995. Noting the limited subcontracting resources and variable staffing levels and workloads, the OIG concluded that the unequal distribution of workload among CMRs was correlated with the uneven coverage of prime contractors. Accordingly, the OIG recommended that SBA more evenly distribute prime contractors among CMRs to improve coverage. However, SBA officials told us that where CMRs are located is driven by factors other than the location of prime contractors with subcontracting plans. For example, they said that although they can request CMRs to relocate to provide better coverage, they cannot require staff to relocate. It is likely that the full extent of the uneven workload and coverage problems has not yet been identified. SBA officials have estimated that as many as 1,500 additional prime contractors with subcontracting plans are not presently captured by SBA's data systems. While SBA officials told us they are working to improve the methods and databases for identifying and tracking prime contractors, progress appears to be very slow. Again in October 1995, the SBA OIG noted that the number of federal prime contractors with subcontracting plans was unknown, complicating SBA's efforts to focus subcontracting program activities and likely resulting in lost small business opportunities. Two primary factors have affected the CMR role: declines in resources and an ad hoc, piecemeal response to resource challenges. Both staffing and travel funds declined substantially over the past several years. With downsizing and retirements taking place and no staff assigned to replace lost personnel, the number of CMR FTEs declined significantly and resulted in workload imbalances across and even within SBA's Area Offices. Travel fund reductions have meant fewer on-site visits and greater reliance on desk reviews. Staff at all levels agreed that insufficient resources--particularly staffing and travel funds--are the biggest obstacles to greater CMR coverage of prime contractors. SBA did not formulate a strategic plan for dealing with the impact of resource reductions on the CMR role. Without such a plan, SBA implemented ad hoc measures to deal piecemeal with resource declines. Nonetheless, these measures collectively have redefined the CMR role. SBA/OGC resources have declined substantially over the past few years. From fiscal year 1991 through fiscal 2000, staff declined 52 percent, from 333 to 159. During this same period, travel funds declined 54 percent, from $440,000 to $201,000. SBA officials agreed that these resource declines have significantly affected the CMR role. For example, SBA Area Directors told us that the need to assign multiple roles to field staff has increased since SBA experienced significant budget and staff cuts in the mid-1990s. Prior to these cuts, most field staff for both the prime and subcontracting programs were hired as specialists for one program. Now most, including CMRs, work on multiple programs. Similarly, the Subcontracting Task Team report pointed out that the merging of the CMR/PCR positions was workload driven and reflected the fact that positions were not being filled when incumbents retired. Finally, several SBA officials told us that to cope with the loss of staff and lack of travel funds, as well as the increased number of special initiatives, the assignment of multiple roles to staff became necessary and the desk review was created to replace the on-site review, when necessary. The decline in travel funds has especially affected on-site compliance monitoring. The lack of travel funds has become a critical factor in decisions about which prime contractors receive on-site reviews, particularly in those Area Offices that cover large geographic areas. For example, in one Area, one CMR said that one major factor determining which contractors receive on-site visits was whether they could be reached on a tank of gas, since travel funds are so limited. In another Area, the Director said that travel funds have been a problem for a long time, and that for many months of the fiscal year, CMRs do not have access to any travel money. This prevents them from being able to effectively select prime contractors for on-site review. Our survey indicated that the lack of travel funds also affected on-site reviews in fiscal year 2000. For example, 76 percent of the responding CMRs rated their Area Office's travel budget as very important in determining which prime contractors to review on-site. In comparison, fewer--66 percent--rated problems with contractor reports as very important. Still fewer--58 percent and 50 percent, respectively--rated poor/marginal ratings of the contractor during the last on-site review and the fact that the contractor had never had an on-site review as very important. Similarly, 78 percent rated the lack of travel funds as a significant barrier to conducting on-site prime contractor reviews. Finally, the Task Team's report expressed concern that without the requisite travel money and other resources, SBA will continue to monitor (on-site) about 12 percent of the total prime contractor portfolio, thus limiting the effectiveness of the Subcontracting Assistance Program. SBA's response to these resource challenges has been largely ad hoc and reactive. As resources have declined, the agency has struggled to keep up with subcontracting program demands by making various piecemeal adjustments to address specific problems, such as assigning multiple roles to CMRs and instituting desk reviews to cover staffing shortages and travel fund declines. SBA has not stepped back--at either the agency or program level--and taken a broader, more strategic look at the CMR role, particularly in the context of today's resource-constrained environment. Strategic planning, assessment, and evaluation are essential elements of good management. This has been recognized for federal agencies since 1993, when the Government Performance and Results Act became law. Effective management requires the establishment of goals and objectives as well as impact or outcome performance measures. SBA has not extended such planning to the CMR role to help address the difficult challenges that declining resources pose for the Subcontracting Assistance Program. SBA's agency-level plan does not address the CMR role at all. Furthermore, SBA officials told us that SBA's current strategic- planning process does not deal with the CMR role in subcontracting or provide for assessments, evaluations, or planning for the CMR role. In addition, they told us that neither OGC nor the Subcontracting Assistance Program has conducted strategic assessments or planning for the CMR role. In sum, while regulations and operating procedures describe a variety of duties and responsibilities that CMRs may perform, SBA has not developed goals and objectives for the CMR role. For example, the agency analyzed what might be desirable levels of prime contractor coverage or subcontracting plan compliance in today's environment and how CMRs might contribute to achieving these goals. In addition, although SBA has productivity measures (e.g., the number of on-site and desk reviews conducted) to track CMRs' performance, it does not have impact or outcome measures--or even such expectations--for CMRs. Finally, SBA has not strategically assessed, evaluated, or planned how best to address critical CMR role issues that have emerged during the past few years, such as the effect of multiple role assignments for CMRs, disagreements about the focus of the CMR role, the relative merits of on-site and desk reviews, and the impact of uneven distributions of CMRs and CMR workloads. Consequently, we do not know how effective the CMR role is. Effectiveness cannot be assessed without outcome and impact measures tied to program goals and objectives. These do not exist for the CMR role. Subcontracting on federal contracts is a large and growing marketplace for small businesses. CMRs have been long considered to be key to fostering small business participation in such subcontracting. However, the value of the CMR role and the effect of recent changes in it are unknown. Unless steps are taken to better assess, evaluate, and plan for the future of the CMR role, SBA will continue to lack an understanding of CMR contributions to small business subcontracting. Moreover, its approach to addressing challenges that CMRs face will continue to be ad hoc and piecemeal. We recommend that the Administrator of SBA assess, evaluate, and plan the CMR role, including addressing such issues as the impact of assigning multiple roles to CMRs, the appropriate CMR role focus, the effectiveness of compliance- monitoring methods, and the impact of uneven CMR workloads and prime contractor coverage; develop specific outcome and impact measures for CMRs' clearly communicate the strategic plan and expectations for the CMR role to both SBA staff and small businesses. SBA provided us with written comments on a draft of this report. The comments, along with our responses, appear in appendix I. SBA neither concurred nor disagreed with our recommendations. However, SBA said that our report will be extremely helpful as it seeks ways to strengthen and improve its Subcontracting Assistance Program. In addition, SBA agreed that it needs to rethink the CMR role in today's environment and noted that some aspects of the role may change in the future. SBA also agreed that it needs to develop outcome or impact measures to better assess the effectiveness of the CMR role. Furthermore, SBA noted that it has changed its Web site to include compliance monitoring as part of the CMR role. SBA objected to some of our conclusions, particularly (1) that SBA's response to the challenges posed by declining resources has been ad hoc and piecemeal; (2) that SBA lacks a clear, strategic vision of the CMR role; and (3) that CMRs' effectiveness is unknown. We continue to believe that our conclusions are correct. They are based on evidence that SBA has not strategically assessed, evaluated, or planned the CMR role in light of the current environment, including developing goals and objectives for the role and impact and outcome measures for CMRs. SBA's comments do not provide any new evidence to the contrary. For example, the task force study that SBA cites as evidence of planning identified some specific problems with the CMR role and recommended some specific solutions. However, it did not strategically assess or plan the CMR role, nor was it tied to any SBA strategic-planning effort. In addition, the study did not use or establish measurable goals and objectives or outcome and impact measures for the CMR role. Similarly, the regulations and operating procedures that SBA references as evidence of vision are not tied to measurable goals and objectives and associated outcome and impact measures. Rather, they simply describe a variety of duties and responsibilities that CMRs are required to perform. In addition, the conditions that SBA cites as evidence of CMRs' effectiveness may be the result of many factors other than CMRs' efforts alone. SBA has not conducted the assessments and evaluations necessary to determine what effect CMRs actually had on these conditions. Finally, SBA's agreement that it needs to rethink the CMR role and develop impact or outcome measures further supports our conclusions. To determine CMRs' duties and responsibilities, we analyzed pertinent legislation, regulations, and operating procedures and reviewed other agency documentation, including staffing profiles and workload analyses. We extracted information from the General Services Administration's Federal Procurement Data System database on prime and subcontractors. We also interviewed officials at SBA headquarters and Area Directors and CMRs located in all six SBA Area Offices. We interviewed all six Area Directors and several Area Supervisors. We also interviewed 15 of the 39 current CMR staff, accounting for about 51 percent of the total CMR FTEs. Finally, we analyzed data from a GAO survey of all 33 staff working as CMRs in fiscal year 2000, who constitute 85 percent of the current CMR population. Our overall response rate was 97 percent. On our survey, we asked a variety of questions about CMRs' roles and responsibilities. To identify the factors affecting the CMR role, we reviewed pertinent legislation, SBA staffing information, workload analyses, and travel budget fund submissions. We also interviewed SBA headquarters and Area Office personnel and reviewed agency audit reports and task force studies. We also met with SBA officials responsible for strategic planning. We conducted our work from November 2001 through July 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees; the Administrator, SBA; and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions concerning this letter, please call me at (617) 565-7555. Key contributors to this review were Catherine Baltzell, Art Fine, David Bennett, Christina Chaplain, and Sylvia Schatz. The following are GAO's comments on the Small Business Administration's letter dated October 8, 2002. 1. We do not agree that 80-percent time is essentially equivalent to 100- percent time. Four staff that work 80 percent of their time as Commercial Marketing Representatives (CMRs) constitute about three full-time equivalents (FTEs), not four FTEs. This is a difference of about 20 percent. As we point out in our report, SBA's use of part-time CMRs for whom the CMR role is, as SBA comments, "a collateral duty," has not meant an increase in CMR staff resources. Rather, total CMR FTEs declined 28 percent from fiscal year 1992 through fiscal 2001. 2. SBA's task force study identified some specific problems with the CMR role and recommended some specific solutions, and SBA's efforts to implement some of these solutions can possibly lead to some incremental improvements. However, the task force study did not strategically assess or plan the CMR role, nor was it tied to any SBA strategic-planning effort. In addition, the study did not use or establish measurable goals and objectives or outcome and impact measures for the CMR role. In other words, the study did not address the larger issues of CMR strategic role assessment and planning. In the absence of such planning, SBA's approach to addressing challenges that CMRs face will continue to be ad hoc and piecemeal. 3. Delegating decisions about the focus of the CMR role to Area Directors may be appropriate. However, SBA has not conducted any assessments or evaluations that address what Area Office factors and characteristics make such delegation essential or effective. Furthermore, SBA has not evaluated the effectiveness of local decisions regarding the balance between compliance monitoring and marketing. The resource pressures on the CMR role heighten our concern. It may be that local decisions about the focus of the CMR role are more influenced by the realities of local resource constraints than by local compliance monitoring and marketing needs. Without sound assessment and evaluation, however, this and many other issues of role focus will remain clouded. 4. The regulations and operating procedures that SBA references do not constitute a strategic vision tied to measurable goals and objectives. Rather, as we discuss in our report, they simply describe a variety of duties and responsibilities that CMRs are required to perform. Since the regulations and guidance do not place a relative order of importance on these duties, and the Small Business Act and the Federal Acquisition Regulations do not mention CMRs, there is no law, regulation, or guidance requiring or suggesting that CMRs prioritize their work according to a strategic vision. In contrast, a strategic vision is broader and more comprehensive. It is expressed in an overall strategic plan that articulates a mission and specific plans to fulfill that mission, including measurable goals and objectives and associated outcome and impact measures. SBA also appears to recognize at least to some degree the limitations of the regulations and operating procedures as a strategic vision because it agrees that it needs to rethink the CMR role and develop outcome or impact measures. 5. SBA recognizes that on-site reviews are both more effective than and preferable to desk reviews but asserts that they are "less cost- effective" and "not always necessary." However, SBA does not offer persuasive evidence to support these assertions. During our review, SBA officials told us that they had not conducted assessments or evaluations of either of these compliance review methods or of their comparative effectiveness. Furthermore, SBA has not identified the criteria--that is, the strategic goals and objectives and associated impact or outcome measures--necessary to guide such assessments and evaluations. SBA also says that it uses the results of desk reviews to determine which prime contractors should receive on-site reviews. However, as we discuss in our report, the lack of travel funds is the primary driver of decisions about which prime contractors receive on-site reviews. 6. SBA observes that in fiscal year 2000, small businesses, in general; small disadvantaged businesses; and women-owned small businesses received "much higher" percentages of all subcontract awards than of prime contract awards. SBA also observes that the percentage of subcontract dollars awarded to small disadvantaged businesses has improved steadily over the past two decades. SBA then attributes both of these conditions solely to CMR efforts. SBA has not conducted the assessments and evaluations necessary to support this conclusion. Moreover, while CMRs' efforts may well have contributed to these conditions, a number of other factors likely have had a significant impact. As we note in our report, federal regulations require a subcontracting plan for each contract or contract modification that exceeds $500,000 ($1 million for construction contracts) and has subcontracting possibilities. Federal agencies are independently responsible for complying with these regulations. Agencies may even conduct their own subcontract-monitoring efforts. For example, DOD reviews subcontracting plans for defense prime contractors. In fact, SBA commented that it has delegated the primary responsibility for monitoring the subcontracting plans of most DOD contractors to the responsible DOD agency so that SBA can focus its limited resources on monitoring civilian agencies' plans. Since DOD accounted for 65 percent of all subcontracted dollars awarded in 2001, it is not likely that CMRs alone are responsible for all small business subcontracting achievements. There are also inherent business incentives for prime contractors to subcontract voluntarily with small businesses. For example, small business subcontractors can provide important specialized capabilities that the prime contractor does not have or wish to invest in developing. Small business subcontractors may also be able to provide some general services faster and more economically, thus saving prime contractor resources. Subcontracting also allows prime contractors to avoid permanent staffing increases that may not be sustainable in the face of market shifts. Finally, as we note in our report, the nature of federal contracting has changed. The number of prime contracts is shrinking, and many prime contracts have become so large that small businesses find it difficult to compete for them. This change alone may heavily influence the conditions that SBA cites as markers of CMRs' effectiveness. 7. We do not agree that our report leaves a mistaken impression with regard to the goals and objectives assigned to CMRs. Rather, we state clearly that SBA has productivity measures (such as the number of on- site and desk reviews conducted) to track CMRs' performance but that it does not have impact or outcome measures--or even such expectations--for CMRs. SBA agrees that it needs to develop outcome or impact measures to better measure CMR effectiveness. 8. We continue to believe that SBA's development of its new database appears to be slow. SBA began developing this new database in early 2001, after experiencing repeated problems with its original database. In October 2001, the SBA officials we interviewed told us that the new database would be operational in January 2002. In February 2002, SBA told us that it would be operational by June. Now, in October 2002, SBA says that it is only in test mode and acknowledges that it will not have a complete list of prime contractors with subcontracting plans until the end of the second quarter of fiscal year 2003. 9. While SBA's original database does provide some useful information, the SBA officials we interviewed told us that the data were not complete. The database did not contain a complete list of prime contractors with subcontracting plans. 10. We continue to have concerns about CMRs' workload and prime contractor coverage. As we discuss in our report, about 18 CMR FTEs nationally monitor the subcontracting activities of the 2,029 prime contractors currently identified. In addition, CMRs have various marketing duties. (In fiscal year 2000, CMRs generally seemed to spend slightly more time on marketing than on compliance monitoring.) CMR compliance monitoring Area Office workloads currently range from 56 to 198 prime contractors per CMR FTE. There are wide variations in CMR workloads both between Area Offices and within more than one Area Office. This situation may be exacerbated when additional contractors with subcontracts are identified and added to CMR workloads.

Subcontracting on federal contracts is a large and growing marketplace for small businesses. The Small Business Administration's (SBA) Commercial Marketing Representatives (CMRs) have long been considered to be key to fostering small businesses' participation in subcontracts. GAO was asked to assess the role that CMRs are playing in administering SBA's subcontracting assistance program. CMRs are supposed to promote small business subcontracting in two primary ways. First, they review prime contractors' compliance with the requirements of their subcontracting plans--either through on-site visits to contractors or by simply reviewing their subcontractor activity reports. Second, they conduct various marketing activities, such as marketing small businesses to prime contractors. In recent years, however, additional duties placed on CMRs have often taken priority over these responsibilities. In fact, in fiscal year 2000, 87 percent of the CMRs had other substantial responsibilities. Moreover, workloads and prime contractor coverage now vary greatly between CMRs. Additionally, CMRs are relying more on "desk" reviews of subcontractors' activity to monitor compliance with subcontracting plans as opposed to on-site reviews. This is a concern to some SBA officials who believe that on-site reviews are more thorough, though others believe the desk review offers the potential for greater coverage. Declines in staffing and travel funds have contributed to the changing role of the CMR. With downsizing and retirements taking place and no staff assigned to replace lost personnel, the number of CMR full-time equivalents (FTEs) has decreased significantly and has resulted in workload imbalances. While there are concerns about the changing nature of the CMR role, SBA has not strategically planned for these changes or assessed their collective impact. Instead, it has implemented ad hoc measures to deal piecemeal with resource declines. Unless steps are taken to better evaluate and plan for the future of CMRs, SBA will continue to lack an understanding of their contributions to small business subcontracting.

Because of potential cost increases, the Air Force established a team--the Joint Estimating Team--to review the total estimated cost of the F-22 program. This team reported in 1997 that the cost of the F-22 production program could grow substantially from the amount planned, but that the contractors should design cost reduction plans to fully offset that cost growth. The Office of the Under Secretary of Defense for Acquisition, Technology and Logistics generally adopted the team's recommendations to change certain aspects of the program as well as a plan to define and implement cost reduction plans. The contractors have continued since 1997 to refine and increase the number and dollar amounts associated with the plans to reduce F-22 production costs. Ultimately, the savings to be achieved by production cost reduction plans must be reflected in lower production contract prices, and lower expenditures by the Air Force than would have been the case if the plans had not been implemented. The Air Force and contractors have entered into memoranda of understanding that relate the affordability of F-22 production to contract prices that will be negotiated for low-rate initial production. The memoranda established target price objectives against which the negotiated prices will be evaluated and financial incentives to achieve the target price objectives for the applicable production lots. To encourage a reduction in production costs, the Air Force and contractors agreed that production cost reduction plans would be proposed, approved and implemented as appropriate. The Air Force agreed to reimburse certain investment costs and to pay award fees to the contractors based on negotiating contracts for certain prices. Until contract prices are negotiated, cost estimates will continue to reflect judgements of estimators about the potential impact of cost reduction plans when implemented. In an effort to offset production cost increases, F-22 contractors have been developing production cost reduction plans to enhance production technology, improve manufacturing techniques, and improve acquisition strategies and subcontract agreements for buying materials. These cost reduction plans are categorized as: implemented, not yet implemented, or "challenge". The Air Force and contractors' criteria for determining if a cost reduction plan is implemented include whether the contractor has submitted a firm-fixed price proposal that recognizes the impact of the cost reduction, the impact of the reduction has been reflected in a current contract price--either with the prime contractor or a supplier to the prime contractor, the contractor has reduced the standard number of hours allocated to a specific task, the reduction has been negotiated in a forward pricing rate agreement, or the reduction has been negotiated with a subcontractor or vendor. Plans are categorized as not yet implemented if none of the criteria are met. Challenge plans represent additional potential savings in areas that have been identified, but that are not yet well defined. The contractors' estimated reductions in costs that are associated with F-22 cost reduction plans increased from $13.1 billion in January 1997, to $21 billion in mid-2000, to $26.5 billion in January 2001. According to the contractors, the $26.5 billion is distributed as follows by category: About $13.7 billion (52 percent) in cost reductions that have been About $8.5 billion (32 percent) in cost reductions not yet implemented; About $4.2 billion (16 percent) labeled as a challenge amount. Figure 1 shows examples of implemented, not yet implemented, and challenge cost reduction plans and the relative progression of these plans toward potentially achieving some cost reductions in the future. In late 2000, the Air Force cost estimators projected, in an estimate supporting the fiscal year 2002 budget request, that production costs of 333 F-22s were likely to exceed the $37.6 billion congressional cost limitation by $2 billion. The cost estimate produced by the Office of the Secretary indicates that costs will likely exceed the congressional cost limitation by $9 billion. Important reasons for the differences between Air Force and Office of the Secretary estimators are differing judgements about labor efficiencies, engine costs, and the viability of cost reduction plans and their potential impact on the cost of F-22 production. In late 1999, both the Air Force and Office of the Secretary cost estimators projected that production costs for 339 aircraft would exceed the congressional cost limitation of $39.8 billion in effect at that time. The Air Force cost estimators projected production costs at $40.8 billion, and the Office of the Secretary estimated $48.6 billion for the 339 production aircraft. Even though the cost estimates exceeded the $39.8 billion cost limitation in effect at that time, the Secretary of the Air Force maintained that the cost would not exceed the limitation, and established the Air Force's position on F-22 production cost at $39.8 billion. In estimates made in December 2000 to support the fiscal year 2002 budget request, both Air Force and Office of the Secretary cost estimators continue to project that F-22 production costs will exceed the congressional cost limitation. Table 1 shows the details of these estimates and the amounts by which the estimates exceed the congressional cost limitation. The current cost limitation of $37.6 billion has been adjusted to reflect planned acquisition of 333 production aircraft, 6 fewer than included in the cost limitation in effect in 1999. This change reflects congressional action on the fiscal year 2000 Air Force budget, in which the Congress approved funding for 6 aircraft using appropriations for Research, Development, Test and Evaluation. Accordingly, the 6 aircraft and associated costs of $1.575 billion (excluding about $200 million that had been appropriated in fiscal year 1999 for advanced procurement for those aircraft) were eliminated from the production cost limitation and added to the development cost limitation. If the Office of the Secretary's higher estimate is correct and additional cost reduction plans are not developed and implemented, we project that the Air Force would have to buy about 85 fewer F-22s (or about 25 percent) than the 333 aircraft now planned to stay within the cost limitation. In our August 2000 report, we had also calculated that the Air Force would not be able to procure about 85 F-22s if the Office of the Secretary's 1999 estimate was correct. The Air Force and the Office of the Secretary cost estimators included in their projections the effect of cost reduction plans that have been categorized as implemented. They also estimated the expected future impact of cost reduction plans that have not yet been implemented. Neither included challenge plans.. Air Force officials advised us that their cost estimates consider the same cost reduction plans as the Office of the Secretary estimators, but that differing judgements regarding the viability of the plans and potential amounts of cost reductions are applied. Table 2 compares the two cost estimates. Air Force and Office of the Secretary officials attributed the majority of the differences in the estimates to the Office of the Secretary having-- Estimated higher labor costs than the Air Force relating to subcontractor Estimated higher costs for the F-22 engines, Excluded some cost reduction plans because of the limited viability, and Estimated more conservative savings from some cost reduction plans. Labor costs for subcontractors projected by estimators from the Office of the Secretary were $3.0 billion more than those projected by Air Force cost estimators. Projections of engine costs by the Office of the Secretary estimators were $1.2 billion higher. The Office of the Secretary also excluded some planned manufacturing cost reduction plans because they were not adequately detailed, and estimated $1 billion less would be saved by the planned manufacturing cost reductions than did the Air Force. Further, the Office of the Secretary estimated $800 million less in cost reductions than the Air Force for plans relating to productivity investments. Because F-22 production is in its early stages, few plans have resulted in actual cost reductions. However, analysis of plans categorized as implemented do show indications that lower costs can be achieved. The Air Force in mid-2000 asked DCAA to conduct a limited, independent review of some of these plans. In late 2000, the DCAA examined eleven cost reduction plans totaling $425 million of total estimated savings of $26.5 billion. These eleven plans were chosen so DCAA could examine cost reduction plans at different stages of development and at different locations including Lockheed Martin Aeronautical Systems, Marietta, Georgia; Lockheed Martin Tactical Aircraft Systems, Fort Worth, Texas; and Boeing Military Aircraft, Seattle, Washington. DCAA did not conduct detailed audits of these cost reduction plans. Their reviews focused primarily on methodologies used to calculate the reported savings or the verification of rates or material cost used in the calculations of contractor reported savings. DCAA did not take exception to the potential cost reductions for 8 of the 11 plans reviewed; found potential cost reductions on two others to be based on judgement, not discrete, measurable events; and found documentation on one to be lacking. Regarding the one plan where documentation was lacking, DCAA auditors were unable to validate contractor estimates totaling around $2 million that involved a new process developed to only require one step to drill a hole in the airframe, rather than two steps. Our August 2000 report recommended that the Secretary of Defense reconcile the number of F-22s that need to be procured with the cost limitation and report to the Congress on the implications of procuring fewer F-22s because of potentially higher costs. DOD partially agreed, stating that the affordability of the F-22 will be evaluated during an upcoming Quadrennial Defense Review. We also found that Air Force quarterly reports provided to the Under Secretary of Defense for Acquisition, Technology, and Logistics did not regularly highlight major changes associated with cost reduction plans. While the status of individual cost reduction plans are tracked by contractors and the F-22 Program Office, we believe regular reporting by the Air Force to the Under Secretary of Defense on the status of these plans is necessary to continuously assess their impact on the estimated cost of F-22 production. Achievement of the estimated cost reductions embodied in the plans is critical to completing F-22 production within the congressional cost limitation. Quarterly reporting of cost reduction plan information enhances its visibility. As a result, we recommended the Air Force report to the Under Secretary of Defense on the status of the cost reduction plans each quarter and that quarterly reports include summary information such as the total number of cost reduction plans identified, the number implemented, the total estimated cost reductions, cost reductions realized to date, and additions or deletions from the plans included in the prior report. DOD concurred with our recommendation in October 2000 and agreed to report cost reduction plan information in subsequent quarterly reviews to the Under Secretary of Defense for Acquisition, Technology and Logistics. DOD agreed that the achievement of cost reduction plans is essential to the execution of the F-22 program within the congressional cost limit. However, our recommendation has not been implemented. In the Air Force's March 2001 quarterly review to the Under Secretary, the information reported included only summary information on the total estimated cost reductions. In commenting on a draft of this report, DOD agreed there continues to be a notable difference between the Air Force and Office of the Secretary F-22 production cost estimates. They indicated that data would emerge toward verification of these estimates as the program begins to accumulate production cost data. DOD also agreed that the dollar amounts associated with the cost reduction plans have continued to increase since 1997. They indicated that as F-22 cost pressures have increased, so have the number of cost reduction plans and the cost reductions attributed to them. In commenting on the progress the Air Force has made toward complying with our recommendation from August 2000 for specific cost reduction plan information to be reported in quarterly reviews, DOD indicated the information reported in the last quarterly review (June 2001) contained more detailed information. We have examined the June 2001 quarterly review and agree it contains more information on cost reduction plans than previous quarterly reviews. Information on the total estimated cost reductions was reported. However, the information reported is still not consistent with what we recommended be reported in August 2000. Information was not reported as we recommended regarding the total number of cost reduction plans identified, the number implemented, the cost reductions realized to date, and any additions or deletions from the plans included in the prior report. To identify the amount of potential offsets attributable to production cost reduction plans by F-22 contractors we reviewed contractor cost reduction plans to determine the basis for the reductions expected to be achieved and whether the reduction was implemented or not yet implemented. We reviewed the documentation from the contractors and discussed the plans and the Air Force procedures for reporting on such plans with contractor and Air Force officials. To compare the latest F-22 production cost estimates of the Air Force and the Office of the Secretary with the congressional production cost limitation and to determine the extent to which cost reductions plans were considered in establishing these estimates, we reviewed the Joint Estimating Team's report and various Air Force briefings. We discussed the estimates with officials in the Office of the Secretary and the Air Force's F-22 Program Office to determine why they differed. We compared the two estimates, including the baseline estimate, the estimated reductions from cost reduction plans, and the net estimates. We obtained a description of the reasons for the variances between the two estimates. We also discussed the estimates and production cost limitation with Air Force and Office of the Secretary officials. The Office of the Secretary cost estimate shown in this report is recorded in briefing documents we obtained during the course of our review. The Office of the Secretary provided us neither its cost estimate nor documentation related to its cost estimate. Officials from the Office of the Secretary cited their policy of not allowing access to that information because they considered it predecisional. However, we corroborated the information contained in the briefing documents we analyzed. An Office of the Secretary official reviewed and agreed with the estimated and projected costs included in this report that are attributed to the Office of the Secretary. To calculate the number of F-22s that could not be procured within the cost limitation we allocated the dollars in the Office of the Secretary estimate to production lots 1 through 11 in the previous Air Force estimate. Starting with the adjusted costs for production lot 1, we determined how many aircraft could be purchased without exceeding the applicable cost limitation To evaluate whether the Office of the Secretary and the Air Force were complying with our prior recommendations, we determined whether a defense review, that potentially could reconcile the number of F-22s needed with the cost limitation, had been completed. We also reviewed recent quarterly briefings from the Air Force to the Under Secretary of Defense for Acquisition, Technology and Logistics to determine how the information included on production cost reduction plans compared to the information we recommended be included in the briefings. In performing our work, we obtained information or interviewed officials from the Office of the Secretary of Defense, Washington D.C.; the F-22 Program Office, Wright-Patterson Air Force Base, Ohio; the Defense Contract Management Agency, Marietta, Georgia; Lockheed Martin Aeronautical Systems, Marietta, Georgia; Lockheed Martin Tactical Aircraft Systems, Fort Worth, Texas; and Boeing Military Aircraft, Seattle, Washington. We performed our work from December 2000 through May 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 Defense; the Secretary of the Air Force; and the Director, Office of Management and Budget. Copies will also be made available to others on request. Please contact me at (202) 512-4841 or Robert D. Murphy at (937) 258-7904 if you or your staff have any questions concerning this report. GAO staff acknowledgments to this report are listed in appendix II. Marvin E. Bonner, Christopher T. Brannon, Edward R. Browning, Arthur L. Cobb, Michael J. Hazard, Don M. Springman, and John Van Schaik made key contributions to this report. Tactical Aircraft: F-22 Development and Testing Delays Indicate Need for Limit on Low-Rate Production (GAO-01-310, Mar. 15, 2001). Supporting Congressional Oversight: Framework for Considering Budgetary Implications of Selected GAO Work (GAO-01-447, Mar. 9, 2001). Defense Acquisitions: Recent F-22 Production Cost Estimates Exceeded Congressional Limitation (GAO/NSIAD-00-178, Aug.15, 2000). Defense Acquisitions: Use of Cost Reduction Plans in Estimating F-22 Total Production Costs (GAO/T-NSIAD-00-200, June 15, 2000). Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2001 (GAO/OCG-00-8, Mar. 31, 2000). F-22 Aircraft: Development Cost Goal Achievable If Major Problems Are Avoided (GAO/NSIAD-00-68, Mar. 14, 2000). Defense Acquisitions: Progress in Meeting F-22 Cost and Schedule Goals (GAO/T-NSIAD-00-58, Dec. 7, 1999). Fiscal Year 2000 Budget: DOD's Procurement and RDT&E Programs (GAO/NSIAD-99-233R, Sept. 23, 1999). Budget Issues: Budgetary Implications of Selected GAO Work for Fiscal Year 2000 (GAO/OCG-99-26, Apr. 16, 1999). Defense Acquisitions: Progress of the F-22 and F/A-18E/F Engineering and Manufacturing Development Programs (GAO/T-NSIAD-99-113, Mar. 17, 1999). F-22 Aircraft: Issues in Achieving Engineering and Manufacturing Development Goals (GAO/NSIAD-99-55, Mar. 15, 1999). F-22 Aircraft: Progress of the Engineering and Manufacturing Development Program (GAO/T-NSIAD-98-137, Mar. 25, 1998). F-22 Aircraft: Progress in Achieving Engineering and Manufacturing Development Goals (GAO/NSIAD-98-67, Mar. 10, 1998). Tactical Aircraft: Restructuring of the Air Force F-22 Fighter Program (GAO/NSIAD-97-156, June 4, 1997). Defense Aircraft Investments: Major Program Commitments Based on Optimistic Budget Projections (GAO/T-NSIAD-97-103, Mar. 5, 1997). F-22 Restructuring (GAO/NSIAD-97-100R, Feb. 28, 1997). Tactical Aircraft: Concurrency in Development and Production of F-22 Aircraft Should Be Reduced (GAO/NSIAD-95-59, Apr. 19, 1995). Tactical Aircraft: F-15 Replacement Issues (GAO/T-NSIAD-94-176, May 5, 1994). Tactical Aircraft: F-15 Replacement Is Premature as Currently Planned (GAO/NSIAD-94-118, Mar. 25, 1994).

The Air Force F-22 Raptor, an air superiority aircraft with an air-to-ground attack capability is set for completion in September 2003. However, contracts to begin 10 low-rate initial production aircraft for fiscal year 2001 have been delayed until after completion of the President's review of Department of Defense (DOD) programs. The Air Force plans to procure 333 production aircraft through 2013. The cost of F-22 production is limited by law, but the total number of aircraft to be procured is unspecified. This report (1) identifies the cost reduction plans by F-22 contractors, (2) compares the military's latest F-22 production cost estimates with the congressional cost limitation and determines the extent to which cost reduction plans were considered in establishing these estimates, and (3) provides the status of DOD's actions to implement GAO's earlier recommendations on production cost estimates and cost reduction plans for the F-22 program. GAO found that enhancing production technology, improving manufacturing techniques, and improving acquisition practices have contributed to cost reductions. Both the Air Force and the Office of the Secretary cost estimators projected that F-22 production costs would exceed the congressional cost limitation if the Air Force were to procure 333 F-22s. DOD and the Air Force have partially responded to the recommendations in GAO's August 2000 report on the F-22.

Data breaches involving PII can occur under many circumstances and for many reasons. They can be inadvertent, such as from the loss of an electronic device, or deliberate, such as from the theft of a device or a cyber-based attack by a malicious individual or group, foreign nation, terrorist, or other adversary. Incidents have been reported at a wide range of public- and private-sector institutions, including federal, state, and local government agencies; educational institutions; hospitals and other medical facilities; financial institutions; information resellers; retailers; and other types of businesses. The loss or unauthorized disclosure or alteration of the information residing on federal systems, which can include PII, can lead to serious consequences and substantial harm to individuals and the nation. Thus it is critical that federal agencies protect their systems and the information on them and respond to data breaches and cyber incidents when they occur. Over the last several years, federal agencies have reported an increasing number of information security incidents to the U.S. Computer Emergency Readiness Team (US-CERT). These include both cyber- and non-cyber- related incidents, and many of them involved PII. Figure 1 shows that the total number of security incidents reported annually more than doubled from fiscal year 2009 to fiscal year 2013. These incidents are categorized by type. Figure 2 shows the categories into which incidents reported in fiscal year 2013 fell. Moreover, a significant number of security incidents reported by agencies have involved PII. Figure 3 shows that the number of incidents involving PII for fiscal years 2009 through 2013 increased over 140 percent. Data breaches at federal agencies have received considerable publicity and raised concerns about the protection of PII at those agencies. Most notably, in May 2006, the Department of Veterans Affairs (VA) reported that computer equipment containing PII on about 26.5 million veterans and active duty members of the military was stolen from the home of a VA employee. More recent examples of incidents that compromised individuals' personal information further highlight the impact that such incidents can have: In July 2013, hackers stole a variety of PII on more than 104,000 individuals from a Department of Energy system. Types of data stolen included Social Security numbers, birth dates and locations, bank account numbers and security questions and answers. According to the department's Inspector General, the combined costs of assisting affected individuals and lost productivity--due to federal employees being granted administrative leave to correct issues stemming from the breach--could be more than $3.7 million. In May 2012, the Federal Retirement Thrift Investment Board (FRTIB) reported a sophisticated cyber attack on the computer of a contractor that provided services to the Thrift Savings Plan. As a result of the attack, PII associated with approximately 123,000 plan participants was accessed. According to FRTIB, the information included 43,587 individuals' names, addresses, and Social Security numbers, and 79,614 individuals' Social Security numbers and other PII-related information. In March 2012, a laptop computer containing sensitive PII was stolen from a National Aeronautics and Space Administration employee at the Kennedy Space Center. As a result, 2,300 employees' names, Social Security numbers, dates of birth, and other personal information were exposed. In February 2009, the Federal Aviation Administration notified employees that an agency computer had been illegally accessed and that employee PII had been stolen electronically. Two of the 48 files on the breached computer server contained personal information about more than 45,000 agency employees and retirees. Title III of the E-Government Act of 2002, known as the Federal Information Security Management Act (FISMA), establishes a framework designed to ensure the effectiveness of security controls over information resources that support federal operations and assets. According to FISMA, each agency is responsible for, among other things, providing information security protections commensurate with the risk and magnitude resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of information collected or maintained by or on behalf of the agency and information systems used or operated by an agency or by a contractor or other organization on behalf of an agency. These protections are to provide federal information and systems with integrity--preventing improper modification or destruction of information; confidentiality--preserving authorized restrictions on access and disclosure; and availability--ensuring timely and reliable access to and use of information. Under FISMA, agencies are required to develop procedures for detecting, reporting, and responding to security incidents, consistent with federal standards and guidelines, including mitigating risks associated with such incidents before substantial damage is done. The law also requires the operation of a central federal information security incident center that compiles and analyzes information about incidents that threaten information security. The Department of Homeland Security (DHS) was given the role of operating this center, which became US-CERT, by the Homeland Security Act. DHS's role is further defined by Office of Management and Budget (OMB) guidance, which requires that incidents involving PII be reported to US-CERT within 1 hour of discovery. US- CERT is also responsible for providing timely technical assistance to operators of agency information systems regarding security incidents, including offering guidance on detecting and handling incidents. In addition to establishing responsibilities for agencies, FISMA assigns specific responsibilities to OMB, the National Institute of Standards and Technology (NIST) and inspectors general: OMB is to develop and oversee the implementation of policies, principles, standards, and guidelines on information security in federal agencies (except with regard to national security systems). It is also responsible for reviewing, at least annually, and approving or disapproving agency information security programs. NIST's responsibilities include developing security standards and guidelines for agencies that include standards for categorizing information and information systems according to ranges of risk levels, minimum security requirements for information and information systems in risk categories, guidelines for detection and handling of information security incidents, and guidelines for identifying an information system as a national security system. Agency inspectors general are required to annually evaluate the information security program and practices of their agency. The results of these evaluations are to be submitted to OMB, and OMB is to summarize the results in its reporting to Congress. In July 2010, the Director of OMB and the White House Cybersecurity Coordinator issued a joint memorandum stating that DHS was to exercise primary responsibility within the executive branch for the operational aspects of cybersecurity for federal information systems that fall within the scope of FISMA. In September 2013 we issued the most recent of our periodic reports on federal agencies' compliance with the requirements of FISMA. Specifically, we reported that, for fiscal year 2012, 24 major federal departments and agencies covered by the Chief Financial Officers Act had established many of the components of an agency-wide information security program, as required by FISMA, but had only partially established others. In particular, with regard to the eight components of an agency-wide security program, 18 agencies had fully implemented a program for managing information security risk, and 6 had partially implemented such a program; 10 agencies had fully documented security policies and procedures, while 12 had partially documented them; 18 agencies had selected security controls for their systems, but 6 had only partially implemented this practice; 22 agencies had established a security training program, and 2 had partially established such a program; 13 agencies were monitoring security controls on an ongoing basis, but 10 agencies had not fully implemented a continuous monitoring program; 19 agencies had established a program for remediating weaknesses in their security policies, practices, and procedures, while 5 had not fully implemented elements of a remediation program; 20 agencies had established an incident response and reporting program, but 3 agencies had not fully established such a program;and 18 agencies had fully established a program for ensuring continuity of operations in the event of a disruption or disaster, but 5 agencies partially implemented a continuity of operations program. The extent to which the agencies had implemented security program components showed mixed progress from fiscal year 2011 to fiscal year 2012. For example, according to inspectors general reports, the number of agencies that had analyzed, validated, and documented security incidents increased from 16 to 19, while the number able to track identified weaknesses had declined from 20 to 15. In addition, although most agencies had implemented elements of their security programs, we and inspectors general continued to identify weaknesses in elements of their programs, such as the implementation of specific security controls. Specifically, most major federal agencies had weaknesses in major categories of information security controls, as defined by our Federal Information System Controls Audit Manual. Table 1 shows, for fiscal year 2012, the number of the 24 major federal agencies that had weaknesses in the five major control categories. Illustrating the extent to which weaknesses continue to affect the 24 major federal agencies, in fiscal year 2013, inspectors general at 21 of the 24 agencies cited information security as a major management challenge for their agency, and 18 agencies reported that information security control deficiencies were either a material weakness or significant deficiency in internal controls over financial reporting in fiscal year 2013. These weaknesses show that information security continues to be a major challenge for federal agencies, putting federal systems and the information they contain, including PII, at increased risk. We and agency inspectors general have continued to make numerous recommendations to agencies aimed at improving their information security posture. Fully implementing these recommendations will strengthen agencies' ability to ensure that their information, including PII, is adequately protected. Even when information security programs have been implemented effectively, data breaches can occur. Accordingly, OMB and NIST have specified key practices for responding to PII data breaches.include management practices such as establishing a data breach response team and training employees on roles and responsibilities for breach response, and operational practices, such as preparing reports on These suspected data breaches and submitting them to appropriate internal and external entities, assessing the likely risk of harm and level of impact of a suspected breach, offering assistance to affected individuals (if appropriate), and analyzing the agency's breach response and identifying lessons learned. Table 2 provides more details on these key management and operational practices. In December 2013, we reported on our review of issues related to PII data breaches. The eight agencies in our review had generally developed, but inconsistently implemented, policies and procedures for responding to a data breach involving PII that addressed key practices. Specifically, with few exceptions, the agencies reviewed addressed the key management and operational practices in their policies and procedures. However, they did not consistently implement the operational practices, as summarized in figure 4. Of the seven agencies we reviewed, only the Internal Revenue Service (IRS) consistently documented both an assigned risk level and how that level was determined for PII-related data breach incidents; only the Army and IRS documented the number of affected individuals for each incident; and only the Army and the Securities and Exchange Commission notified affected individuals for all high- risk breaches. The seven agencies did not consistently offer credit monitoring to individuals affected by PII-related breaches. None of the seven agencies consistently documented lessons learned from PII breaches, including corrective actions to prevent similar incidents in the future or whether better security controls could help detect, analyze, and mitigate future incidents. Incomplete guidance from OMB contributed to this inconsistent implementation. For example, OMB's guidance does not make clear how agencies should use risk levels in making a determination about notification to affected individuals. Further, OMB guidance states that the risk levels should help determine when and how notification should be provided, but it does not set specific requirements for notification based on agency risk determinations. In addition, OMB guidance for reporting on data breaches involving PII may be too stringent. Specifically, OMB guidance requires that DHS collect information about PII-related breaches within 1 hour, but officials at US-CERT and the agencies in our review generally agreed that this requirement was difficult to meet and may not provide US-CERT with the best information. For example, some agencies noted that it is difficult to provide a meaningful report on a breach within 1 hour since relevant information--such as how much PII was affected or the extent of the risk--may not be available within that time frame. Agency officials also questioned the value of reporting certain types of PII breaches, such as paper-based incidents or incidents involving the loss of hardware containing encrypted PII, individually to US-CERT, as currently required. Officials from US-CERT agreed that their office should not be receiving all PII-related incident reports individually as they occur. According to DHS officials, the PII-related incident data they collect are not generally used to help remediate incidents or provide technical assistance to agencies. Rather, the information is compiled in accordance with certain FISMA requirements and reported to OMB. We determined that the limited use of these data calls into question OMB's requirement that such incidents be reported within 1 hour. US-CERT officials also noted that the vast majority of PII-related data breaches are not cybersecurity related--that is, they do not involve attacks on or threats to government systems or networks. Thus receiving information about such incidents on an individual basis may not be useful to the office in pursuing its mission. Finally, we reported that seven of the eight agencies in our review had not requested technical assistance from US-CERT when PII data breaches occurred. DHS officials said that US-CERT is not equipped to assist agencies in remediating paper-based incidents, and agencies agreed that issues they encounter in dealing with PII breaches are generally best addressed by agency general counsel staff or privacy officers. DHS's Privacy Office has developed guidance that addresses agencies' obligations to protect PII and procedures to follow when a suspected PII incident occurs, but this is geared more toward developing agency response capabilities in general rather than supporting decision-making related to specific incidents. In our report, we recommended that OMB revise its guidance on federal agencies' response to PII-related data breaches to include (1) guidance on notifying affected individuals based on a determination of the level of risk; (2) criteria for determining whether to offer assistance, such as credit monitoring, to affected individuals; and (3) revised requirements for reporting PII-related breaches to US-CERT. In commenting on our draft report, officials from OMB's Office of Information and Regulatory Affairs stated that our recommendation did not sufficiently specify what supplemental guidance was needed; we subsequently revised the draft recommendation to provide greater specificity. We also made a number of recommendations to the individual agencies in our review to improve their response to data breaches involving PII. Specifically, we recommended, among other things, that several of the agencies (1) consistently document risk levels and how those levels are determined for PII-related data breach incidents; (2) document the number of affected individuals for each incident; and (3) identify lessons learned from responses to PII breaches. Agencies varied in the extent to which they concurred with these recommendations, with some providing information pertaining to the recommendations. In response to agencies' comments, we clarified or deleted three draft recommendations but retained the rest as still warranted. In a forthcoming report, to be issued later this spring, we plan to provide the results of our study of federal agencies' ability to respond to cyber incidents. More specifically, we have determined the extent to which (1) federal agencies are effectively responding to cyber incidents, and (2) DHS is providing cybersecurity incident assistance to agencies. While these results are still subject to revision, we estimate, based on a statistical sample of cyber incidents reported in fiscal year 2012, that the 24 major federal agencies did not effectively or consistently demonstrate actions taken in response to a detected cyber incident in about 65 percent of reported incidents. For example, agencies identified the scope of incidents in the majority of cases, but did not always demonstrate that they had determined the impact of an incident. In addition, agencies did not consistently demonstrate how they had handled other key activities, such as whether actions to prevent the recurrence of an incident were taken. We also reviewed six selected agencies in greater depth and found that, while they had developed parts of policies, plans, and procedures to guide incident response activities, their efforts were not comprehensive or fully consistent with federal requirements. The inconsistencies in agencies' incident response activities suggest that additional oversight, such as that provided by OMB and DHS during the CyberStat review process, not covered agencies' incident response practices. may be warranted. However, these meetings generally have With regard to DHS's role, we observed that DHS provides various services to agencies to assist them in preparing to handle incidents, maintain awareness of the current threat environment, and deal with ongoing incidents. However, opportunities exist to enhance the usefulness of these services, such as improving reporting requirements and evaluating the effectiveness of these services. To improve the effectiveness of government-wide cyber incident response activities, we are planning to make recommendations to OMB and DHS to address agency response practices. We also plan to make recommendations to the six selected agencies in our review to improve their cyber incident response programs. CyberStat reviews are in-depth sessions with National Security Staff, OMB, DHS, and an agency to discuss that agency's cybersecurity posture and opportunities for collaboration. In summary, the increasing number of cyber incidents at federal agencies, many involving the compromise of PII, highlights the need for focused agency action to ensure the security of the large amount of sensitive personal information collected by the federal government. These actions include establishing comprehensive agency-wide information security programs and consistently and effectively responding to incidents when they occur. As we and inspectors general have long pointed out, federal agencies continue to face challenges in effectively implementing all elements of their information security programs. Likewise, agencies have not been consistent or fully effective in responding to data breaches and cyber incidents. Ongoing improvements in these areas are needed to help ensure that the personal information entrusted to the government by American citizens and other individuals will be protected. Chairman Carper, Ranking Member Dr. Coburn, and Members of the Committee, this concludes my statement. I would be happy to answer any questions you may have. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Other key contributors to this statement include John A. de Ferrari and Jeffrey Knott (assistant directors), Larry E. Crosland, Marisol Cruz, and Lee McCracken. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The federal government collects large amounts of PII from the public, including taxpayer data, Social Security information, and patient health information. It is critical that federal agencies ensure that this information is adequately protected from data breaches, and that they respond swiftly and appropriately when breaches occur. Since 1997, GAO has designated information security as a government-wide high-risk area. Further, data breaches at federal agencies have raised concerns about the protection of PII. Federal laws and other guidance specify the responsibilities of agencies in securing their information and information systems and in responding to data breaches. This testimony addresses federal agencies' efforts to secure their information and respond to data breaches. In preparing this statement, GAO relied primarily on previously published and ongoing work in this area. The number of reported information security incidents involving personally identifiable information (PII) has more than doubled over the last several years (see figure). As GAO has previously reported, major federal agencies continue to face challenges in fully implementing all components of an agency-wide information security program, which is essential for securing agency systems and the information they contain--including PII. Specifically, agencies have had mixed results in addressing the eight components of an information security program called for by law, and most agencies had weaknesses in implementing specific security controls. GAO and inspectors general have continued to make recommendations to strengthen agency policies and practices. In December 2013, GAO reported on agencies' responses to PII data breaches and found that they were inconsistent and needed improvement. Although selected agencies had generally developed breach-response policies and procedures, their implementation of key practices called for by Office of Management and Budget (OMB) and National Institute of Standards and Technology guidance was inconsistent. For example, only one of seven agencies reviewed had documented both an assigned risk level and how that level was determined for PII data breaches; two agencies documented the number of affected individuals for each incident; and two agencies notified affected individuals for all high-risk breaches. the seven agencies did not consistently offer credit monitoring to affected individuals; and none of the seven agencies consistently documented lessons learned from their breach responses. Incomplete guidance from OMB contributed to this inconsistent implementation. For example, OMB's guidance does not make clear how agencies should use risk levels to determine whether affected individuals should be notified. In addition, the nature and timing of reporting requirements may be too stringent. In its December 2013 report, GAO made 22 recommendations to the agencies included in its review aimed at improving their data breach response activities. GAO also recommended that OMB update its guidance on federal agencies' responses to PII-related data breaches. Agency responses to GAO's recommendations varied.

The Medicare statute divides benefits into two parts: (1) "hospital insurance," or part A, which covers inpatient hospital, skilled nursing facility, hospice, and certain home health care services, and (2) "supplementary medical insurance," or part B, which covers physician and outpatient hospital services, diagnostic tests, and ambulance and other medical services and supplies. Part B can also cover home health services under certain conditions. In 1996, Medicare paid approximately $18 billion for both part A and part B home health services. By fiscal year 1998, Medicare's home health spending is estimated to total nearly $22 billion, representing a 700-percent increase from 1989 when spending was $2.7 billion. During this period, coverage requirements changed so that more beneficiaries qualified for home health services. In addition, advances in medical technologies and changes in practice patterns resulted in more beneficiaries needing these services. The number of home health agencies certified to care for Medicare beneficiaries has also grown rapidly since 1989--from 5,700 to more than 10,000 in September 1997. part-time or intermittent basis. Required medical supplies are also covered. Services must be furnished under a plan of care prescribed and periodically reviewed by a physician. As long as the care is reasonable and necessary, there are no limits on the number of visits or length of coverage. Medicare does not require copayments or deductibles for home health care except for durable medical equipment. HCFA, the agency within HHS responsible for administering Medicare, uses six regional claims processing contractors (which are insurance companies) to process and pay home health claims. These contractors--called regional home health intermediaries (RHHI)--process the claims submitted by the 10,000-strong home health agencies, which are paid on the basis of the costs they incur up to predetermined cost limits. RHHIs are responsible for ensuring that Medicare does not pay home health claims when beneficiaries do not meet the Medicare home health criteria, when services claimed are not reasonable or necessary, or when the volume of services exceeds the level called for in an approved plan of treatment. They carry out these responsibilities through medical reviews of claims. HHS' Office of the Inspector General has emphasized the importance of medical reviews. In the Office's sampling of claims--which included not just home health but all Medicare services--it found that 99 percent of the improper payments the Office identified appeared to be correct on the surface and were detected only through medical record reviews. their reviews on providers that have unexplained utilization patterns. A similar kind of analysis led our Office of Special Investigations to identify the case being discussed today. Since Medicare's inception, the home health benefit has undergone several changes in which coverage criteria and their enforcement have alternately tightened and relaxed. The net effect of the changes was that home health care became available to more beneficiaries, for less acute conditions, and for longer periods of time. The benefit was legislatively liberalized in 1980 when limits on the number of services and cost-sharing requirements were eliminated. When prospective payment for hospital services was initiated in 1983, the use of home health services was expected to increase significantly because of incentives for hospitals to discharge patients more quickly. However, HCFA's relatively stringent interpretation of coverage criteria and emphasis on medical record review kept home health growth in check. Then in 1989, coverage rules relaxed following a court case brought in 1988 that challenged HCFA's interpretation that individuals had to satisfy both the part-time and intermittent criteria to qualify for the home health benefit (Duggan v. Bowen). HCFA was obliged to revise its coverage guidelines to allow individuals to qualify by satisfying either criterion, which, as we reported in 1996, enabled home health agencies to increase the frequency of home visits. The requirements were also changed so that patients qualified for skilled observation by a nurse or therapist if a reasonable potential for complications or possible need to change treatment existed. The skilled observation, in turn, qualified the beneficiary for home health aide visits. The benefit also allowed maintenance therapy when therapy services were required to simply maintain function; previously, patients had to show improvement from such services to be covered. Medicare Home Health Benefit: Congressional and HCFA Actions Begin to Address Chronic Oversight Weaknesses An individual does not have to be bedridden. . . . the condition of these patients should be such that there exists a normal inability to leave home, and, consequently, leaving their homes would require a considerable and taxing effort. If the patient does in fact leave the home, the patient may nevertheless be considered homebound if the absences from the home are infrequent or for periods of relatively short duration or are attributable to the need to receive medical treatment. In our interviews for the 1996 study, HCFA and intermediary officials said that few denials were made on the basis that the beneficiary was not homebound. In particular, the "infrequent" and "short duration" language qualifying permissible absences from the home would likely result in the reversal of homebound-criterion-based denials at the reconsideration or appeals level. My colleague's statement on improper activities by Mid-Delta Home Health describes patients whose eligibility on the basis of being homebound was highly questionable. The relationship between the funding levels for payment safeguard activities and the proportion of claims reviewed helps explain the weak oversight of Medicare's home health benefit in the 1990s. In 1985, legislation more than doubled funding for contractors to conduct claims reviews, enabling intermediaries to review over 60 percent of the home health claims processed in 1986 and 1987. By 1995, however, when payment safeguard funding for medical review of all Medicare-covered part A services had substantially declined (from $61 million in 1989 to $33 million in 1995), RHHIs reviewed about 1 percent of home health claims. As a result of decreased review, agencies were less likely to be caught if they abused the home health benefit. During this period, however, the number of home health agencies participating in Medicare increased by more than a third, and the volume of home health claims processed more than tripled. In January 1998, HCFA announced an increase in the number of claims reviews to about 1.3 percent--still far short of the peak levels of the mid-1980s. efforts, and HCFA has not routinely given guidance on best practices. For example, HCFA has not issued any guidance suggesting that claims for unusually high dollar amounts per beneficiary trigger prepayment reviews. In a recent study of home health claims reviews, we conducted a test of 80 high-dollar claims at one RHHI. The RHHI had initially processed and approved the claims without review but denied them subsequent to our test. The following examples illustrate the importance of careful prepayment review: Of $18,132 in charges for the care of a beneficiary's decubitus ulcer (open wound) for 30 days, more than a third ($6,483)--including the charges for almost half of the skilled nursing visits (four per day)--were for services not considered medically necessary. Of $4,100 in charges for supplies related to care provided over 4 weeks, 31 percent were denied because they were not adequately documented in the medical records or should have been included as part of the nurse's visit and not billed separately. About half the amount denied was for supplies never received by the beneficiary. Of $17,953 in charges for medical supplies related to the treatment of a beneficiary's salivary gland disease, the intermediary denied the entire amount because the medical documentation was not consistent with the itemized list of supplies provided, thus failing to support the claims for supplies the agency billed for. Nine of the 80 claims tested--representing nearly half ($61,250) of the total dollars disapproved--were denied because the home health agency did not submit any of the medical records the intermediary had requested for the review. would have increased before the recent infusion of new payment safeguard funds through HIPAA. Cost-report audits help identify providers' attempts to shift inappropriate or unnecessary costs to the program. Providers paid under Medicare's cost-based reimbursement systems--including home health agencies--are reimbursed not on the basis of a fee schedule or the charge for a service but on the basis of the actual cost to provide the service, subject to certain limits. RHHIs reimburse cost providers in several steps, including making periodic interim payments based on the provider's historical costs and current cost estimates, determining an end of the year tentative settlement based on a report the provider submits that details operating costs and the share related to the provision of Medicare services, and--in relatively few cases--conducting a detailed review (audit) of the cost report to determine the appropriate final settlement amounts. Between 1991 and 1996, the chances, on average, that a provider's cost report would be subject to an audit fell from about 1 in 6 to about 1 in 13. Much of our statement on Mid-Delta Home Health centers on improperly claimed and reimbursed costs included in cost reports that had not received an in-depth audit until our investigation prompted a closer look. In January 1998, HCFA announced its plans to double the number of comprehensive home health agency audits it performs each year--from about 900 to 1,800. care--required at least every 62 days--are not routinely reviewed by an independent party, such as Medicare's RHHIs. In our December 1997 report on the home health survey and certification process, we noted that becoming a Medicare-certified home health agency has been too easy, particularly in light of the number of problem agencies identified in various studies in recent years. Until recently, there was little screening of those seeking Medicare certification. We found that the initial survey of an applicant occurred too soon after the agency began operating, offering little assurance that the agency was providing or capable of providing quality care. For example, Medicare certified an agency owned by an individual with no home health experience who turned out to be a convicted drug felon and who later pled guilty with an associate to having defrauded Medicare of over $2.5 million. Rarely were new home health agencies found to fail Medicare's certification requirements, which call for agencies to (1) be financially solvent, (2) comply with antidiscrimination provisions in title VI of the Civil Rights Act of 1964, and (3) meet Medicare's conditions of participation. Home health agencies self-certify their solvency, agree to comply with the act, and undergo a very limited survey that few fail. Until less than a year ago, HCFA had been certifying about 100 new home health agencies each month. Once certified, it was unlikely that home health agencies would be terminated from the program or otherwise penalized, even when they had been repeatedly cited for not meeting Medicare's conditions of participation or for providing substandard care. From September 15, 1997, until January 13, 1998, the Administration placed a moratorium on admitting new agencies into the Medicare program. The moratorium was intended to stop the admission of untrustworthy providers while HCFA strengthened its requirements for entering the program. HCFA used this period of time to develop new surety bond regulations (as mandated by BBA), capital requirements to ensure adequate operating funds, and procedures to better scrutinize the integrity of home health agency applicants. HCFA plans to issue additional provider certification and renewal regulations in the coming months. With the passage of HIPAA and BBA, the Congress recently provided important new resources and tools to fight fraud and abuse in general and home health care offenses in particular. In addition to earmarking funds for anti-fraud-and-abuse activities, the legislation offers specific civil and criminal penalties against health care fraud as well as opportunities to improve detection capabilities. For example, HIPAA makes health care fraud a separate criminal offense and establishes fines and other penalties for federal health care offenses. BBA stiffens the exclusion penalties for individuals convicted of health care fraud. It also establishes civil monetary penalties for such offenses as contracting with an excluded provider, failing to report adverse actions under the new health care data collection program, and violating the antikickback statute. With respect to the home health benefit in particular, BBA targets historical abuses. For example, in an egregious case of home health fraud that our Office of Special Investigations reported on in 1995, the HHS Inspector General charged ABC Home Health Care with billing Medicare for items that were solely for the owner's or his family's personal use, including condominium utility expenses, maid services, and automobile lease payments. BBA mandates the elimination of cost-based reimbursement and its replacement by a prospective payment method. Under this method, home health providers will be expected to deliver care for a fixed payment, thus breaking the link in the future between the home health agency's costs and Medicare's payments. level of care in favor of those who would be less expensive to treat. The adjuster would not only protect access to care but would also help ensure that Medicare was paying agencies more appropriately. Base-rate development: Because HCFA intends to use historical data on cost of services to calculate a base rate of an episode of care, it must take care to avoid incorporating the inflated costs identified in the cost reports of problem home health agencies. For example, in 1995 we reported on a number of problems with payments by intermediaries for surgical dressing supplies, indicating that excessive costs are being included and not removed from home health agency cost reports. We have suggested at several hearings that HCFA audit thoroughly a projectable sample of home health agency cost reports so that the results could be used to adjust HCFA's cost database to help ensure that unallowable costs are not included in the base for setting prospective rates. Until October 1999, when the law requires prospective payment for home health services to be implemented, Medicare will continue to reimburse for home health services on a cost basis. Addressing this situation, BBA prohibits Medicare payments for items that have historically been associated with inflated cost reports, such as entertainment, gifts, donations, educational expenses, and the personal use of automobiles. It also tightens per-visit limits and imposes new ones based on historical per-beneficiary costs. Other BBA provisions designed to improve home health oversight include clarifying the terms "part-time" and "intermittent" nursing care; requiring the HHS Secretary to recommend by October 1, 1998, criteria to clarify the term "homebound"; and requiring a $50,000-minimum surety bond from home health agencies. Medicare because of little scrutiny during the certification process. While HIPAA and BBA have given HCFA greater resources and tools to fight fraud and abuse, the home health benefit will continue to require concerted oversight. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions you or the Subcommittee Members may have. Medicare: Improper Activities by Mid-Delta Home Health (GAO/T-OSI-98-6, Mar. 19, 1998; GAO/OSI-98-5, Mar. 12, 1998). Long-Term Care: Baby Boom Generation Presents Financing Challenges (GAO/T-HEHS-98-107, Mar. 9, 1998). Medicare Home Health Agencies: Certification Process Ineffective in Excluding Problem Agencies (GAO/HEHS-98-29, Dec. 16, 1997). Medicare Home Health: Success of Balanced Budget Act Cost Controls Depends on Effective and Timely Implementation (GAO/T-HEHS-98-41, Oct. 29, 1997). Medicare Fraud and Abuse: Summary and Analysis of Reforms in the Health Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act of 1997 (GAO/HEHS-98-18R, Oct. 9, 1997). Medicare: Need to Hold Home Health Agencies More Accountable for Inappropriate Billings (GAO/HEHS-97-108, Jun. 13, 1997). Medicare: Home Health Cost Growth and Administration's Proposal for Prospective Payment (GAO/T-HEHS-97-92, Mar. 5, 1997). Medicare: Home Health Utilization Expands While Program Controls Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996). Medicare: Excessive Payments for Medical Supplies Continue Despite Improvements (GAO/HEHS-95-171, Aug. 8, 1995). Medicare: Allegations Against ABC Home Health Care (GAO/OSI-95-17, July 19, 1995). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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GAO discussed Medicare benefit fraud and abuse in the home health industry, focusing on: (1) the general nature of beneficiary eligibility criteria; (2) the diminished Medicare contractor review and audit effort; (3) weaknesses in Medicare's home health provider certification processes; and (4) new tools Congress provided to strengthen oversight of the home health benefit. GAO noted that: (1) several historical factors have produced an environment that, until recently, has enabled improper billing and cost-reporting practices to grow unchecked; (2) legislation and coverage policy changes in response to court decisions in the 1980's made it easier for beneficiaries to obtain home health coverage and harder for Medicare claims reviewers to deny questionable claims; (3) from 1989 until recently, the volume of claims reviews and cost-report audits plummeted, reducing the likelihood that improprieties would be detected; (4) because of the laxity of Medicare's survey and certification process, agencies with no experience or proof of capability were certified as providers; (5) moreover, home health agencies were unlikely to be terminated or penalized even when they were cited repeatedly for providing substandard care or otherwise failed to comply with conditions of participation; (6) recent legislation has enhanced the Health Care Financing Administration's ability to improve its oversight of the home health benefit; (7) in 1995, a multiagency government effort known as Operation Restore Trust launched a new anti-fraud-and-abuse campaign, targeting home health services, among others, for investigation; (8) the following year, the Health Insurance Portability and Accountability Act of 1996 provided dedicated funding to finance, in part, the investigative efforts of the Department of Health and Human Services' Office of the Inspector General and other federal agencies; and (9) a year later, the Balanced Budget Act of 1997 mandated reforming Medicare's method of paying for home health services and contained additional provisions designed to tighten the use and oversight of the home health benefit.

Highway public-private partnerships have the potential to provide numerous benefits to the public sector. There are also potential costs and trade-offs. Highway public-private partnerships created to date have resulted in advantages from the perspective of state and local governments, such as the construction of new infrastructure without using public funding and obtaining funds by extracting value from existing facilities for reinvestment in transportation and other public programs. For example, the state of Indiana received $3.8 billion from leasing the Indiana Toll Road and used those proceeds to fund a 10-year statewide transportation plan. As we reported in 2004, by relying on private-sector sponsorship and investment to build roads rather than financing the construction themselves, states (1) conserve funding from their highway capital improvement programs for other projects, (2) avoid the up-front costs of borrowing needed to bridge the gap until toll collections became sufficient to pay for the cost of building the roads and paying the interest on the borrowed funds, and (3) avoid the legislative or administrative limits that govern the amount of outstanding debt these states are allowed to have. All of these results are advantages for the states. Highway public-private partnerships potentially provide other benefits, including the transfer or sharing of project risks to the private sector. Such risks include those associated with construction costs and schedules and having sufficient levels of traffic and revenues to be financially viable. Various government officials told us that because the private sector more reliably analyzes its costs, revenues, and risks throughout the life cycle of a project and adheres to scheduled toll increases, it is able to accept large amounts of risk at the outset of a project, although the private sector prices all project risks and bases its final bid proposal, in part, on the level of risk involved. In addition, the public sector can potentially benefit from increased efficiencies in operations and life-cycle management, such as increased use of innovative technologies. Highway public-private partnerships can also potentially provide mobility and other benefits to the public sector, through the use of tolling. The highway public-private partnerships we reviewed all involved toll roads. These benefits include better pricing of infrastructure to reflect the true costs of operating and maintaining the facility and thus improved condition and performance of public infrastructure, as well as the potential for more cost effective investment decisions by private investors. In addition, through congestion pricing, tolls can be set to vary during congested periods to maintain a predetermined level of service, creating incentives for drivers to consider costs when making their driving decisions, and potentially reducing the demand for roads during peak hours. Although highway public-private partnerships can be used to obtain financing for highway infrastructure without the use of public sector funding, there is no "free money" in highway public-private partnerships. Rather, this funding is a form of privately issued debt that must be repaid. Private concessionaires primarily make a return on their investment by collecting toll revenues. Though concession agreements can limit the extent to which a concessionaire can raise tolls, it is likely that tolls will increase on a privately operated highway to a greater extent than they would on a publicly run toll road. Tolls are generally set in accordance with concession agreements and, in contrast to public-sector practices, allowable toll increases can be frequent and automatic. The public sector may lose control over its ability to influence toll rates, and there is also the risk of tolls being set that exceed the costs of the facility, including a reasonable rate of return if, for example, a private concessionaire gains market power because of the lack of viable travel alternatives. In addition, highway public-private partnerships also potentially require additional costs to the public sector compared with traditional public procurement, including the costs associated with (1) required financial and legal advisors, and (2) private-sector financing compared with public-sector financing. In addition to potentially higher tolls, the public sector may give up more than it receives in a concession payment in using a highway public-private partnership with a focus on extracting value from an existing facility. In exchange for an up-front concession payment, the public sector gives up control over a future stream of toll revenues over an extended period of time, such as 75 or 99 years. It is possible that the net present value of the future stream of toll revenues (less operating and capital costs) given up can be much larger than the concession payment received. Concession payments could potentially be less than they could or should be. Conversely, because the private sector takes on substantial risks, the opposite could also be true--that is, the public sector might gain more than it gives up. Using a highway public-private partnership to extract value from an existing facility also raises issues about the use of those proceeds and whether future users might potentially pay higher tolls to support current benefits. In some instances, up-front payments have been used for immediate needs, and it remains to be seen whether these uses provide long-term benefits to future generations who will potentially be paying progressively higher toll rates to the private sector throughout the length of a concession agreement. Both Chicago and Indiana used their lease fees, in part, to fund immediate financial needs. Both also established long-term reserves from the lease proceeds. Conversely, proceeds from the lease of Highway 407 ETR in Toronto, Canada, went into the province's general revenue fund. Trade-offs from the public perspective can also be financial, as highway public-private partnerships have implications for federal tax policy. Private firms generally do not realize profits in the first 10 to 15 years of a concession agreement. However, the private sector receives benefits from highway public-private partnerships over the term of a concession in the form of a return on its investment. Private-sector investors generally finance large public-sector benefits early in a concession period, including up-front payments for leases of existing projects or capital outlays for the construction of new, large-scale transportation projects. In return, the private sector expects to recover any and all up-front costs, as well as ongoing maintenance and operation costs, and generate a return on investment. Furthermore, any cost savings or operational efficiencies the private sector can generate, such as introducing electronic tolling, improving maintenance practices, or increasing customer satisfaction in other ways, can further boost the return on investment through increased traffic flow and increased toll revenue. Unlike public toll authorities, private-sector firms pay federal income tax. Current tax law allows private sector firms to deduct depreciation on assets involved with highway public-private partnerships for which they have "effective ownership." Effective ownership of assets requires, among other things, that the length of a concession agreement be equal to or greater than the useful economic life of the asset. According to financial and legal experts, including those who were involved in the lease of the Chicago Skyway in Chicago, Illinois, and the Indiana Toll Road, the useful economic life of those facilities was lengthy. The requirement to demonstrate effective asset ownership thus required lengthy partnership concession periods and contributed to the 99-year and 75-year concession terms for the Chicago Skyway and Indiana Toll Road, respectively. These financial and legal experts told us that as effective owners, the private investors can claim full tax deductions for asset depreciation within the first 15 years of the lease agreements. Determining the extent of depreciation deductions associated with highway public-private partnerships, and the extent of foregone revenue to the federal government, if any, from these deductions is difficult to determine because they depend on such factors as taxable income, total deductions, and marginal tax rates of private-sector entities involved with highway public-private partnerships. Financial experts told us that in the absence of the depreciation benefit, the concession payments to Chicago and Indiana would likely have been less than the $1.8 billion and $3.8 billion paid, respectively. However, foregone revenue to the federal government from tax benefits associated with transportation projects can potentially amount to millions of dollars. For example, as we reported in 2004, foregone tax revenue when the private-sector used tax-exempt bonds to finance three projects with private sector involvement--the Pocahontas Parkway, Southern Connector, and Las Vegas Monorail--were between $25 million and $35 million. The public interest in highway public-private partnerships can and has been considered and protected in many ways. State and local officials in the U.S. projects we reviewed heavily relied on concession terms. Most often, these terms were focused on, among other things, ensuring performance of the asset, dealing with financial issues, and maintaining the public sector's accountability and flexibility. Included in the protections we found in agreements we reviewed were: Operating and maintenance standards: These standards are put in place to ensure that the performance of the asset is upheld to high safety, maintenance, and operational standards and can be expanded when necessary. For example, based on documents we reviewed, the standards on the Indiana Toll Road require the concessionaire to maintain the road's condition, utility, and level of safety including a wide range of roadway issues, such as signage, use of safety features such as barrier walls, snow and ice removal, and the level of pavement smoothness that must be maintained. Expansion trigger requirements: These triggers require that a concessionaire expand a facility once congestion reaches a certain level. Some agreements can be based on forecasts. For example, on the Indiana Toll Road, when service is forecasted to fall below certain levels within 7 years, the concessionaire must act to improve service, such as by adding additional capacity at its own cost. Revenue-sharing mechanisms: These mechanisms require a concessionaire to share some level of revenues with the public sector. For example, on one Texas project, if the annual return on investment of the private concessionaire is at or below 11 percent, then the state could share in 5 percent of all revenues. If it is over 15 percent, the state could receive as much as 50 percent of the net revenues. While these protections are important, governments in other countries, including Australia and the United Kingdom, have developed systematic approaches to identifying and evaluating public interest before agreements are entered into, including the use of public interest criteria, as well as assessment tools, and require their use when considering private investments in public infrastructure. These tools include the use of qualitative public interest tests and criteria to consider when entering into public-private partnerships. For example, a state government in Australia uses a public interest test to determine how the public interest would be affected in eight specific areas, including whether the views and rights of affected communities have been heard and protected and whether the process is sufficiently transparent. These tools also include quantitative tests such as Value for Money and public sector comparators, which are used to evaluate if entering into a project as a public-private partnership is the best procurement option available. While similar tools have been used to some extent in the United States, their use has been more limited. For example, Oregon hired a consultant to develop public-sector comparators to compare the estimated costs of a proposed highway public-private partnership with a model of the public sector's undertaking the project. According to the Innovative Partnerships Project Director in the Oregon DOT, the results of this model were used to determine that the added costs of undertaking the project as a public- private partnership (given the need for a return on investment by the private investors) were not justifiable given the limited value of risk transfer in the project. While this study was conducted before the project was put out for official concession, it was prepared after substantial early development work was done by private partners. Neither Chicago nor Indiana had developed public interest tests or other tools prior to the leasing of the Chicago Skyway or the Indiana Toll Road. Using up-front public interest analysis tools can assist public agencies in determining the expected benefits and costs of a project and an appropriate means to undertake the project. Not using such tools may lead to certain aspects of protecting public interest being overlooked. For example, concerns by local and regional governments in Texas helped drive statewide legislation requiring the state to involve local and regional governments to a greater extent in future highway public-private partnerships. Elsewhere, in Toronto, Canada, the lack of a transparency about the toll rate structure and misunderstanding about the toll structure of the Highway 407 ETR facility was a major factor in significant opposition to the project. Direct federal involvement in highway public-private partnerships has generally been limited to projects in which federal requirements must be followed because federal funds have or will be used. At the time of our February 2008 report, minimal federal funding has been used in highway public-private partnerships. While direct federal involvement has been limited, the administration and the DOT have actively promoted highway public-private partnerships through policies and practices, including the development of experimental programs that waive certain federal regulations and encourage private investment. For example, until August 2007, federal regulations did not allow private contractors to be involved in highway contracts with a state department of transportation until after the federally mandated environmental review process had been completed. Texas applied for a waiver to allow its private contractor to start drafting a comprehensive development plan to guide decisions about the future of the corridor before its federal environmental review was complete. These flexibilities were pivotal to allowing highway public- private partnership arrangements in both Texas and Oregon to go forward while remaining eligible for federal funds. The Federal Highway Administration (FHWA) and DOT also promoted highway public-private partnerships by developing publications to educate state transportation officials about highway public-private partnerships and to promote their use, drafting model legislation for states to consider to enable highway public-private partnerships in their states, creating a public-private partnership Internet Web site, and making tolling a key component of DOT's congestion mitigation initiatives. Recent highway public-private partnerships have involved sizable investments of funds and significant facilities and could pose national public interest implications such as interstate commerce that may transcend whether there is direct federal investment in a project. For example, both the Chicago Skyway and the Indiana Toll Road are part of the Interstate Highway System; the Indiana Toll Road is part of the most direct highway route between Chicago and New York City and, according to one study, over 60 percent of its traffic is interstate in nature. However, federal officials had little involvement in reviewing the terms of either of these concession agreements before they were signed. In the case of Indiana, FHWA played no role in reviewing either the lease or national public interests associated with leasing the highway, nor did it require the state of Indiana to review these interests. Texas envisions constructing new international border crossings and freight corridors using highway public-private partnerships, which may greatly facilitate North American Free Trade Agreement-related truck traffic to other states. However, no federal funding had been expended in the development of the project. Given the minimal federal funding in highway public-private partnerships to date, few mechanisms exist to consider potential national public interests in them. For example, FHWA officials told us that no federal definition of public interest or federal guidance on identifying and evaluating public interest exists. The absence of a clear identification and furtherance of national public interests in the national transportation system is not unique to highway public-private partnerships. We have called for a fundamental reexamination of the nations surface transportation policies, including creating well-defined goals based on identified areas of national interest, incorporating performance and accountability into funding decisions, and more clearly defining the role of the federal government as well as the roles of state and local governments, regional entities, and the private sector. Such a reexamination provides an opportunity to identify emerging national public interests (including tax considerations), the role of the highway public-private partnerships in supporting and furthering those national interests, and how best to identify and protect national public interests in future public-private partnerships. Highway public-private partnerships show promise as a viable alternative, where appropriate, to help meet growing and costly transportation demands. The public sector can acquire new infrastructure or extract value from existing infrastructure while potentially sharing with the private sector the risks associated with designing, constructing, operating, and maintaining public infrastructure. However, highway public-private partnerships are not a panacea for meeting all transportation system demands, nor are they without potentially substantial costs and risks to the public--both financial and nonfinancial--and trade-offs must be made. Highway public-private partnerships are fairly new in the United States, and, although they are meant to serve the public interest, it is difficult to be confident that these interests are being protected when formal identification and consideration of public and national interests has been lacking, and where limited up-front analysis of public interest issues using established criteria has been conducted. Consideration of highway public- private partnerships could benefit from more consistent, rigorous, systematic, up-front analysis. Benefits are potential benefits--that is, they are not assured and can only be achieved by weighing them against potential costs and trade-offs through careful, comprehensive analysis to determine whether public-private partnerships are appropriate in specific circumstances and, if so, how best to implement them. Despite the need for careful analysis, the approach at the federal level has not been fully balanced, as DOT has done much to promote the benefits, but comparatively little to either assist states and localities weigh potential costs and trade-offs, nor to assess how potentially important national interests might be protected in highway public-private partnerships. We have suggested that Congress consider directing the Secretary of Transportation to develop and submit objective criteria for identifying national public interests in highway public-private partnerships, including any additional legal authority, guidance, or assessment tools that would be appropriately required. We are pleased to note that in a recent testimony before the House, the Secretary indicated a willingness to begin developing such criteria. This is no easy task, however. The recent report by the National Surface Transportation Policy and Revenue Study Commission illustrates the challenges of identifying national public interests as the Policy Commission's recommendations for future restrictions--including limiting allowable toll increases and requiring concessionaires to share revenues with the public sector--stood in sharp contrast to the dissenting views of three commissioners. We believe any potential federal restrictions on highway public-private partnerships must be carefully crafted to avoid undermining the potential benefits that can be achieved. Reexamining the federal role in transportation provides an opportunity for DOT, we believe, to play a targeted role in ensuring that national interests are considered, as appropriate. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee might have. For further information on this statement, please contact JayEtta Z. Hecker at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony were Steve Cohen (Assistant Director), Bert Japikse, Richard Jorgenson, Carol Henn, Matthew Rosenberg, and James White. This is a work of the U.S. government and is not subject to copyright protection in the United States. This 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 private sector is increasingly involved in financing and operating highway facilities under long-term concession agreements. In some cases, this involves new facilities; in other cases, firms operate and maintain an existing facility for a period of time in exchange for an up-front payment to the public sector and the right to collect tolls over the term of the agreement. In February 2008 GAO reported on (1) the benefits, costs, and trade-offs of highway public-private partnerships; (2) how public officials have identified and acted to protect the public interest in these arrangements; and (3) the federal role in highway public-private partnerships and potential changes in this role. The Senate Finance Committee asked GAO to testify on this report and to highlight its discussion of tax issues. GAO reviewed the experience of projects in the U.S. (including the Chicago Skyway and Indiana Toll Road agreements), Australia, Canada, and Spain. Highway public-private partnerships provide potential benefits, such as sharing risks with the private sector, more efficient operations and management of facilities and, through the use of tolling, increased mobility and more cost-effective investment decisions. There are also potential costs and trade-offs--there is no "free" money in public-private partnerships and it is likely that tolls on a privately operated highway will increase to a greater extent than they would on a publicly operated toll road. There are also financial trade-offs. Unlike public toll authorities, the private sector pays federal income taxes and can deduct depreciation on assets for which they have effective ownership. The extent of these deductions and the amount of foregone revenue, if any, to the federal government is difficult to determine. Demonstrating effective ownership may require lengthy concession periods and, according to experts involved in the lease of the Chicago Skyway and Indiana Toll Road, contributed to the 99-year and 75-year concession terms on these two facilities, respectively. Experts also told us that in the absence of the depreciation benefit, the concession payments to Chicago and Indiana would likely have been less than $1.8 billion and $3.8 billion, respectively. Highway public-private partnerships in the U.S. that GAO reviewed sought to protect the public interest largely through concession agreement terms prescribing performance and other standards. While these protections are important, governments in other countries, such as Australia, have developed systematic approaches to identifying and evaluating public interest and require their use when considering private investments in public infrastructure. Similar tools have been used to some extent in the United States, but their use has been more limited. Using up-front tools can also assist public agencies in determining the expected benefits and costs of a project and an appropriate means to deliver the project. Not using such tools may lead to certain aspects of protecting the public interest being overlooked. While direct federal involvement has been limited to where federal investment exists and while the DOT has actively promoted them, highway public-private partnerships may pose national public interest implications such as interstate commerce that transcend whether there is direct federal investment in a project. However, given the minimal federal funding in highway public-private partnerships to date, little consideration has been given to potential national public interests in them. GAO has called for a fundamental reexamination of our surface transportation policies, including creating well-defined goals based on identified areas of national interest. This reexamination provides an opportunity to identify emerging national public interests (including tax considerations), the role of the highway public-private partnerships in supporting and furthering those national interests, and how best to identify and protect national public interests in future highway public-private partnerships.

Spending for the elderly's long-term care was $91 billion, or about $12,000 per disabled elderly person, in 1995, the last year for which data on expenditures from all sources are available. The elderly and their families represent the largest single group of purchasers of long-term care, spending almost $36 billion dollars out of pocket, or almost 40 percent of the total $91 billion expenditures for long-term care. (See table 1 for expenditures and fig. 1 for percentages by funding source.) This spending does not include the substantial unpaid support provided to the elderly by family and friends. Studies have found that about 65 percent of disabled elderly living in the community rely exclusively on unpaid sources for their care. Public funding for long-term care comes primarily from Medicaid, which finances almost one-third of long-term care--$28.5 billion in 1995--and Medicare, which funds one-fourth--$22.7 billion. Long-term care expenditures for the elderly are disproportionately used to purchase nursing home care; about 70 percent of total elderly long-term care expenditures are for nursing homes. The baby boom generation, about 76 million people born between 1946 and 1964, will contribute to rapid growth in the number of elderly individuals who need long-term care and the resources required to pay for it. Forecasts of the exact number who will need such care are uncertain because of differing conclusions about the effect of better health care and lifestyles on the subpopulation that may eventually need long-term care. Nevertheless, the number will be very large even if the most rosy scenario prevails. Today's elderly make up about 13 percent of the total population. The number of individuals aged 65 and over will make up about 20 percent of the total population in 2030, when the first of the baby boomers will reach their 85th birthday. From 1997 to 2030, individuals 85 and older, the most rapidly growing age group and the group most likely to require long-term care, will more than double--from about 3.9 million to about 8.5 million individuals--and by 2050 will more than double again--to about 18 million individuals. (See fig. 2 for the distribution of the elderly in 1997, 2030, and 2050.) Nearly a quarter of the nation's elderly population--an estimated 7.3 million in 1994 --require some assistance with either activities of daily living (ADL) or instrumental activities of daily living (IADL), or both. Almost 80 percent of these 7.3 million elderly live at home or in other community-based settings, and about 30 percent of them are severely disabled, requiring assistance with at least three ADLs or needing substantial supervision because of cognitive impairment or other behavioral problems. About 22 percent--or 1.6 million--live in nursing homes. An estimated 1 million individuals live in residential settings that have services available, such as assisted living facilities. Experts agree that population aging will increase the number of disabled elderly needing long-term care over the next several decades, but no consensus exists on the size of that increase. While the sheer number of baby boomers is expected to drive up demand for long-term care services, projections of the number of elderly needing long-term care in the next century vary because of different assumptions about the future prevalence of disability. Predicting the magnitude and composition of the growth in the elderly needing long-term care services is complicated by several factors. Some researchers argue that medical advances have increased life expectancy but have not changed the onset of illness. They predict that declining death rates may actually increase the need for long-term care if more people live to develop age-related disabling conditions or live longer with existing disabilities. Others argue that disability is becoming increasingly compressed into a shorter portion of the lifespan, decreasing the number of years long-term care is needed. Improved treatments or prevention of common disabling conditions among the elderly, such as strokes and arthritis, could lessen long-term care need, independent of death rates. Nonetheless, recent forecasts of the number of disabled baby boomers who will need long-term care have been developed but differ widely, ranging from 2 to 4 times the current number of disabled elderly. How this will translate into the need for long-term care services and actual spending will depend on the public and private resources devoted to purchasing long-term care. How the increased long-term care needs of the baby boom generation will be met or financed is uncertain. The past 2 decades have seen change in the types of long-term care services used by the elderly and in who paid for these services. The change has occurred in large part because of shifts in Medicare and Medicaid coverage as well as private purchases of long-term care. We still are experiencing considerable change, which makes it extremely difficult to project what type of services the baby boomers will need and who will pay for them. Historically, the vast majority of long-term care was supplied in nursing homes or at home by family members and friends. Nursing home care was financed almost equally by residents' own resources and state Medicaid programs. Over the past 15 years, there has been a substantial increase in the number of people receiving paid services at home and relying less on nursing homes. A major contributor to this trend has been increased use of Medicaid-financed home care following passage of home and community-based waiver provisions in 1981. In addition, since 1989, Medicare expenditures for home care have grown rapidly. Medicaid is the largest public funder of long-term care. Most of Medicaid expenditures are for nursing home care, but in the past 15 years there has been a shift to home care. The result is a significant change in the proportion of people with the need for long-term care who are receiving Medicaid-financed services and in the average cost of those services. State Medicaid programs have, by default, become the major form of insurance for long-term care, but only after individuals have become impoverished by "spending down" their assets. Medicaid long-term care spending for many of the elderly results from Medicaid coverage of people who have become poor as the result of depleting assets to pay for nursing home care, the average costs of which exceed $40,000 per year. In most states, nursing home residents without a spouse cannot have more than $2,000 in countable assets before becoming eligible for Medicaid coverage of their care. About two-thirds of nursing home residents in 1994 relied on Medicaid to help pay for their care. Slightly more than 25 percent of Medicaid nursing home residents were admitted as private pay residents. Both multiple nursing home stays and lengths of stay affect whether a private pay resident spends down to Medicaid eligibility. For example, more than one-half of residents who entered as private pay residents and who have been in the nursing home 3 to 5 years are on Medicaid. Traditionally, states emphasized nursing home care. In attempts to control their long-term costs, states imposed controls on the number of nursing home beds. They required assessment and screening of prospective residents to ensure that Medicaid financed nursing home care for the people who were most disabled. Some states also implemented payment systems to provide these facilities incentives to admit and care for the more disabled and higher cost residents. States limited eligibility for home care out of concern about the potential cost of covering services for the large number of disabled who were cared for by their families at home. However, as part of the Omnibus Budget Reconciliation Act of 1981 (P.L. 97-35), the Congress established the home and community-based service waiver program: section 1915(c) of the Social Security Act gave states the option of applying for Medicaid waivers to fund home and community-based services for people who meet Medicaid eligibility requirements. These waivers gave states the ability to restrict the number and costs of eligible individuals. As states have become more experienced with the waivers and confident of their ability to manage these programs, they have expanded their financing of home and community-based care. All states now have home and community-based waivers, and over 200 waiver programs serve more than 250,000 individuals nationwide. Medicaid expenditures for home and community-based waivers have increased an average of 32.7 percent per year from 1987 to 1996, reaching a level of $5.8 billion in 1996. States have used home and community-based waiver services not just to serve additional people at home, but to reduce reliance on nursing homes. In an earlier report, we found that three states we reviewed had restricted construction of new nursing home beds as they financed more home care services. According to the National Academy for State Health Policy, 27 states provide waiver services in assisted living or board and care facilities. Such settings may provide an alternative to nursing homes for someone whose care needs or family resources make it difficult to stay at home. As they address the challenges identified with providing long-term care, states are expected to increasingly focus on Medicaid-funded care provided in the beneficiary's home or a community-based setting rather than expanding long-term care in nursing homes. Spending on home care in 1996 increased about 24 percent in comparison to the 3-percent increase in the overall program. According to the National Academy for State Health Policy, seven more states plan to expand home care to community-based residential settings, such as assisted living or board and care facilities. In the last 5 years, a number of states also have created forums to consider the direction and financing of long-term care--the National Conference of State Legislatures reports that at least 23 states have formed task forces or study commissions on this issue. Since 1989, Medicare has become the largest funder of long-term home care, financing $14.3 billion in care--or more than half of the home care purchased for the elderly in 1995. A new home health payment system, mandated by the Balanced Budget Act of 1997, however, may reduce the amount of long-term home care financed by Medicare. Medicare traditionally had focused on acute care and consequently paid very little for long-term care. However, legislative and court decisions and consequent changes in guidelines have essentially transformed the home health benefit from one focused on patients needing short-term care after hospitalization to one that serves chronic, long-term care patients as well.As a result, Medicare, on a de facto basis, has financed an increasing amount of long-term care through its home health care benefit. The increase in Medicare home health care use has been dramatic. Emerging trends in home health use suggest that Medicare is covering long-term care for increasing numbers of beneficiaries, rather than just skilled home health care. Both the number of beneficiaries receiving home health care and the number of visits per user more than doubled from 1989 to 1996. A small but significant proportion of users receive extensive long-term support primarily from home health aides. The share of visits supplied by home health aides increased from about 25 percent of all home health visits in 1988 to almost 50 percent in 1995. At the same time, home health users without a prior hospitalization accounted for about one-third of all users in 1993. Figure 3 shows the growth of Medicare home health care expenditures and highlights major policy changes. Medicare's role could shift significantly as a result of the Balanced Budget Act. The Balanced Budget Act will change the way that Medicare home health care is reimbursed from a cost-based per-visit payment system to a case-mix-adjusted prospective payment system in 1999. How this system will be designed to reflect differences in home health care needed by individuals with various disabilities and what incentives the system creates will have major implications for the amount of future Medicare funding for long-term care. The baby boomers, in general, are expected to be wealthier in retirement than their parents. Those who are single or less educated, or who do not own homes, however, may not do as well. At the same time that many baby boomers will have greater financial resources, they will have fewer social resources, since this generation has remained single longer and had fewer children. As a result, a smaller proportion of this generation will have a spouse or adult children to provide unpaid caregiving. Geographic dispersion of families and the large percentage of women who work outside the home also may reduce the number of unpaid caregivers available to elderly baby boomers, creating more need for purchased services. While many baby boomers will have more financial resources in retirement than their parents, what might be more important is whether they have insurance. Private long-term care insurance has been seen as a means of reducing the catastrophic financial risk for people needing long-term care, and relieving some of the financing burden currently falling on public programs. Some observers also believe private long-term care insurance could provide individuals greater choice in selecting services to satisfy their long-term care needs. Nevertheless, a very small proportion of the elderly or near-elderly have purchased long-term care insurance during the past 10 years. Concern exists that consumers are not knowledgeable about their risk for needing long-term care and about the limitations on Medicare and Medicaid long-term care coverage, and that this lack of awareness decreases demand for long-term care insurance. Questions also remain about the affordability of policies for the majority of elderly people and the value of the coverage relative to the premiums being charged. Private long-term care insurance is a relatively new product with a growing market. In 1986, approximately 30 insurers were selling long-term care insurance policies of some type, and an estimated 200,000 people had purchased these policies. The Health Insurance Association of America (HIAA) has found that by 1995 125 insurers were offering long-term care insurance policies, and more than 4 million policies had been sold. Many fewer individuals had coverage, since many policies sold did not remain in force as individuals stopped paying premiums or dropped one policy to purchase another. Long-term care insurance financed less than 1 percent of long-term care in 1995. Long-term care insurance is still struggling to gain a greater market share. A recent survey of the elderly and near-elderly found that only about 40 percent believe that they or their family will be responsible for paying for their long-term care. HIAA reports that the industry expects continued growth, however, and that the "tax deductibility" of qualified policies will help accelerate that growth. The affordability of long-term care insurance will have a large impact on its market share. Assessments of the ability of private long-term care insurance to provide coverage to a majority of people who will need long-term care are pessimistic. HIAA reports that in 1995 policies paying $100 a day for nursing home care and $50 a day for home health care averaged annual premiums of $1,881 when purchased at the age of 65 and $5,889 when purchased at the age of 79. Long-term care insurance, then, is most affordable for middle- and upper-income individuals. One recent study estimates that the proportion of elderly who can afford long-term care insurance ranges from 10 to 20 percent. Not only is the cost of long-term care insurance a problem for the elderly and near-elderly, but questions also remain about the value of the coverage relative to the premiums being charged. Individuals who consider and decide against purchasing long-term care insurance indicate skepticism about the policies' providing adequate coverage. Also, as insurers have better understood their risks and competition has increased, premiums have decreased. Some potential purchasers may defer purchase of long-term care insurance because they expect a "better buy" in the future--that is, improved coverage at less cost. We have reported on a number of problems in the long-term care insurance market--including disclosure standards, inflation protection options, clear and uniform definitions of services, eligibility criteria, grievance procedures, nonforfeiture of benefits, options for upgrading coverage, and sales commission structures that reduce incentives for marketing abuses. By the end of 1996, all 50 states had adopted laws and regulations pertaining to long-term care insurance, and 38 states had adopted at least one-half of the provisions of the 1996 National Association of Insurance Commissioners (NAIC) Long-Term Care Insurance Model Act. The Health Insurance Portability and Accountability Act requires that long-term care insurance policies written after December 1996 meet requirements of NAIC Long-Term Care Insurance Model Act to qualify as tax-deductible. This requirement adds to consumers' protection. In conclusion, even though we cannot know the exact numbers of the baby boom generation who will require long-term care services, we do know that the aging of the baby boomers will lead to a tremendous increase in the elderly population in the next 3 decades and an even larger increase in the 85-and-over population who are more likely to use long-term care services. Financing these services will be a challenge for the baby boomers, their families, and federal and state governments. Mr. Chairman, this concludes my statement. I would be happy to answer any questions you or Members of the Committee might have at this time. Long-Term Care: Consumer Protection and Quality-of-Care Issues in Assisted Living (GAO/HEHS-97-93, May 15, 1997). Medicare Post-Acute Care: Home Health and Skilled Nursing Facility Cost Growth and Proposals for Prospective Payment (GAO/T-HEHS-97-90, Mar. 4, 1997). Medicare: Home Health Utilization Expands While Program Controls Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996). Long-Term Care: Current Issues and Future Directions (GAO/HEHS-95-109, Apr. 13, 1995). Long-Term Care: Diverse, Growing Population Includes Millions of Americans of All Ages (GAO/HEHS-95-26, Nov. 7, 1994). Medicaid Long-Term Care: Successful State Efforts to Expand Home Services While Limiting Costs (GAO/HEHS-94-167, Aug. 11, 1994). Health Care Reform: Supplemental and Long-Term Care Insurance (GAO/T-HRD-94-58, Nov. 9, 1993). Long-Term Care Insurance: High Percentage of Policyholders Drop Policies (GAO/T-HRD-93-129, Aug. 25, 1993). Long-Term Care Insurance: Risks to Consumers Should Be Reduced (GAO/T-HRD-91-14, Dec. 26, 1991). Long-Term Care Insurance: Consumers Lack Protection in a Developing Market (GAO/T-HRD-92-5, Oct. 24, 1991). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the challenges the country will face in financing long-term care for the baby boom generation, focusing on: (1) the current spending for long-term care for the elderly; (2) the increased demand that the baby boom generation will likely create for long-term care; (3) recent shifts in Medicaid and Medicare financing of long-term care; and (4) the potential role of private long-term care insurance in help finance this care. GAO noted that: (1) spending for long-term care for the elderly totalled almost $91 billion in 1995, the most recent year for which expenditures from all sources were available; (2) almost 40 percent of these dollars were paid for by the elderly and their families and almost 60 percent by Medicaid and Medicare; (3) these amounts, however, do not include many hidden costs of long-term care, since an estimated two-thirds of the disabled elderly living in the community rely exclusively on their families and other unpaid sources for their care; (4) according to current estimates by the Congressional Research Service, nearly a quarter of the nation's elderly population--over 7 million elderly people--have some form of disability for which they require assistance, such as help with bathing, dressing, eating, preparing meals, or taking medicine; (5) as the 76-million-strong baby boom generation ages, so too will its demand for long-term care increase; (6) long-range predictions of the magnitude of the baby boomers' long-term care needs, however, vary, with estimates of the disabled elderly ranging from 2 to 4 times the current disabled elderly; (7) estimates of cost are even more imprecise due to the uncertain impact of several important factors, including who will be needing care, the types of care they will need, and who will fund it; (8) Medicaid and Medicare, which currently finance almost two-thirds of long-term care, have undergone significant changes in recent years; (9) while historically the majority of Medicaid long-term care expenditures were for nursing home care, in recent years there has been a shift toward more financing of home and community-based care; (10) at the same time, Medicare, the largest public payer for home-based care, has been paying for care that more and more resembles long-term care; (11) private long-term care insurance, seen as a means of helping reduce the catastrophic financial risk for people needing long-term care and some of the financing burden that falls to public programs, has contributed little to date; (12) it is a relatively new form of insurance with a growing market; and (13) nevertheless, after 10 years, a very small proportion of the elderly or near-elderly have coverage.

Two "secret shopper" surveys of bank and thrift sales of mutual funds have been issued since we released our report. One was done by a private research organization called Prophet Market Research & Consulting and was completed in April 1996. The other was done for FDIC by another research organization, Market Trends, Inc., and was completed May 5, 1996. Both surveys indicated that many banks and thrifts still were not fully disclosing to their customers the risks associated with mutual fund investing. The results of the FDIC-sponsored survey, which was the most comprehensive, indicated that, in about 28 percent of the 3,886 in-person visits, bank and thrift representatives did not disclose to the shoppers that nondeposit investment products, including mutual funds, are not insured by FDIC. The results were worse for the 3,915 telephone contacts--with no disclosure in about 55 percent of the contacts. Similarly, in about 30 percent of the in -person visits, bank and thrift representatives did not inform shoppers that nondeposit investment products were not deposits or other obligations of, or guaranteed by, the institution (about 60 percent nondisclosure for telephone contacts). Finally, in about 9 percent of the in-person visits, bank and thrift representatives did not tell shoppers that their investment was subject to loss, including loss of principal (about 39 percent nondisclosure for telephone contacts). The survey's findings on the physical location of the mutual fund sales area were nearly the same as ours, with about 37 percent of the institutions not clearly having separated the mutual fund sales area from the deposit-taking area. The survey's findings reaffirm our earlier findings and indicate that a significant number of banks and thrifts continue to inadequately disclose four basic risks associated with mutual fund investing. Neither the FDIC-sponsored survey nor ours followed the sales process through to the point at which a mutual fund was purchased and an account was opened. However, the interagency guidelines emphasize that bank customers should clearly and fully understand the risks of investing in mutual funds, and that these risks should be orally disclosed to the customer during any sales presentation. Written disclosures or other documentation are to be available to customers during the sales process that may eventually fully inform them of the risks involved. Nevertheless, making these disclosures orally during initial sales presentations is particularly important because written disclosures may not always be read or understood until after the investors' funds are committed, if at all. In responding to our report, the Federal Reserve and OCC indicated that bank practices generally complied with the interagency guidelines by mid-1995. However, FDIC's survey results indicated that many banks and thrifts still need to improve their compliance with the guidelines so that their customers are adequately informed of the risks associated with mutual fund investing. According to banking and securities regulators, additional actions are being planned or taken to improve disclosures to bank customers. Some of these actions affect only those banks or thrifts under one regulator's jurisdiction--such as FDIC's efforts to improve its data systems to provide its examiners up-to-date information for more targeted examinations, or each regulator's efforts to improve its examination guidelines. Other efforts are also being undertaken by all four bank and thrift regulators. These interagency efforts include efforts to adopt requirements that bank personnel engaged in the sale of nondeposit investment products take the securities industry's standard qualifying examinations, better training for bank personnel selling uninsured investment products, reexamination of the interagency policy statement on mutual fund sales. business, and pass relevant qualifications examinations administered for the industry by NASD. The Securities Exchange Act of 1934 excludes banks from its broker-dealer registration requirements. As a result, banks have been able to choose whether to have their own employees sell mutual funds without the need to be associated with a Securities and Exchange Commission (SEC)-registered broker-dealer or subject to NASD oversight. If bank employees are to take NASD's qualifying examination as the banking regulators propose, they are not to be registered with NASD because they would not be associated with a broker-dealer. However, under the proposal, they will have met the same initial qualifications as NASD-registered representatives. In addition, to maintain their qualifications, they would be subject to the same continuing education requirements imposed on NASD-registered representatives. FDIC officials told us that, in addition to the NASD testing and education requirements, the banking regulators plan to do further training to improve bank and thrift employees' awareness of the importance of complying with the interagency guidelines. They said that although they found better compliance by NASD-registered representatives, the difference between these representatives and other employees was small, indicating that additional training might help further improve compliance. Banking regulators told us that efforts to reexamine the interagency policy statement are focused on clarifying (1) what situations do or do not constitute a sales presentation and (2) what the institution's obligation is in assuring that an investment recommendation meets the customer's needs. An FDIC official told us that the banking regulators want to make the interagency statement less vague so that banks and thrifts can better understand what is expected of them and their employees. restrictions on brokers' use of confidential financial information from bank or thrift customer files were stricter than the interagency guidance and NASD's proposed prohibition on the payment of referral fees by broker-dealers to employees of the bank differed from the interagency guidance, which allows payment of these fees. After analyzing nearly 300 comment letters, NASD made changes to its proposed rules. The revised proposal defines confidential financial information and allows its use, but only with the prior written approval of the customer; the prohibition on referral fees remains. NASD forwarded its revised proposal to SEC for approval. SEC published the proposal for public comment and received 86 comment letters by the end of the comment period in May 1996. Most of the letters were from banking organizations or bank-affiliated broker-dealers. SEC is currently analyzing the comment letters before deciding whether to approve the proposed rules. Ensuring that salespersons provide bank customers with appropriate risk disclosures during all mutual fund sales presentations presents a difficult challenge to regulators and to banks and thrifts. Over time, this task may become easier as distinctions among financial service providers continue to fade and customers become more aware of the differences between insured and uninsured products. The bank and securities regulators' proposed actions for additional training of investment representatives, requiring testing of employees, and reexamining the interagency guidelines should help improve bank and thrift compliance with disclosures required by these guidelines. However, additional steps, which may have the potential to help improve compliance with the risk disclosure guidelines, could also be taken. Such actions, for example, could include regulators (1) continuing to monitor bank and thrift disclosure practices through periodic secret shopper surveys, (2) encouraging banks and thrifts to adopt this kind of testing procedure as part of their own internal compliance audits, if legal concerns can be overcome and it is cost effective; and (3) segmenting and publicizing the results of regulatory reviews of compliance with the interagency guidelines, including the results of secret shopper surveys, when appropriate. sales presentations between customers and bank employees, and they would have difficulty doing so without affecting the customer's privacy or the performance of the employee. FDIC reported that it plans to evaluate the need for another secret shoppers survey on the basis of the results of bank examinations over the next 2 years. Because of the difficulty in monitoring oral sales presentations through examinations, it seems to us that decisions concerning the need for secret shopper surveys should not be based solely on examination results. Instead, using such surveys to supplement examination results could give banks and thrifts an additional incentive to better ensure that their personnel are providing proper disclosures. Bank regulators told us that some banks are using secret shopper surveys to monitor their own employees. A Federal Reserve official said that banks could make them part of their internal compliance audits. The need for federal regulators to do such surveys may decrease if more banks and thrifts do their own and if disclosure of mutual fund risks improves. Federal regulators could encourage banks and thrifts to adopt these surveys as part of their internal compliance audits if legal concerns can be overcome and it is cost effective. For example, some self-assessment activities, like self-testing, pose a dilemma for lending institutions in that under current law the results of self-testing programs may not be privileged or protected from disclosure to federal regulatory agencies or private litigants. Hence, despite the obvious preventative benefits to be gained from having lenders adopt continuous self-testing programs, many institutions are reluctant to undertake such programs out of fear that the findings could be used as evidence against them, especially by third-party litigants. One way to help resolve this issue would be to remove or diminish the disincentives associated with self-testing by alleviating the legal risks of self-testing when conducted by banks who, in good faith, are seeking to improve their mutual fund risk disclosures. Banking regulators suggested to us that they might also encourage depository institutions to consider methods other than secret shopper surveys to test compliance with disclosure requirements, such as calling their customers to determine if the sales person made the proper disclosures. investors than they are the safety and soundness of a depository institution. Therefore, bank and thrift regulators may want to consider the feasibility of segmenting the results of their reviews of compliance with disclosures required by the interagency guidelines, including the results of any secret shopper surveys, from other examination results and of making those results available to the public. Such segmentation and disclosure is already required in connection with regulators' assessments of bank and thrift compliance with the Community Reinvestment Act. In summary, the results of our survey and the more recent surveys, indicate that there may be a persistent problem with many banks and thrifts failing to make the basic risk disclosures required under the interagency guidelines. These disclosures are important because they can help investors fully understand the risks of investing in bank mutual funds. Banking regulators and some banks and thrifts are taking steps to better ensure that the required disclosures are made. While these actions are positive, other steps, which may have the potential to help increase compliance with these guidelines and better ensure that investors are adequately informed of the risks of their investment decisions, could also be taken. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the Federal Deposit Insurance Corporation's (FDIC) survey concerning the risks associated with mutual fund investing. GAO noted that: (1) sales of mutual funds through banks and thrifts have increased dramatically; (2) the value of assets managed by these institutions doubled from $219 billion in December 1993, to $420 billion in March 1996; (3) 2,800 banks sold over $40 billion in both proprietary and nonproprietary mutual fund shares during 1995; (4) in February 1994, FDIC, the Office of the Comptroller of the Currency, the Federal Reserve, and the Office of Thrift Supervision jointly issued guidelines on the policies and procedures for selling nondeposit investment products; (5) these interagency guidelines require that bank and thrift customers be fully informed of the risks of investing in mutual funds; (6) the guidelines also require that banks' mutual fund sales activities be physically separated from bank deposit activities; (7) the results of the FDIC survey indicate that many banks and thrifts are not disclosing the risks associated with mutual fund investing; and (8) all four bank and thrift regulators are making an effort to ensure that bank personnel pass qualifying examinations and receive better training in selling uninsured investment products, and reexamine the current interagency policy on mutual fund sales.

Nonagricultural pesticides encompass a wide range of products--including home and garden insecticides and fungicides, sterilants, insect repellents, and household cleaning agents--and the potential for exposure is significant. The effects of exposure on humans depend on the characteristics of the pesticide, dosage, duration of the exposure (usually through inhalation, skin contact, or ingestion), and physiological reaction of the person affected. Some people suffer no effects; others experience symptoms ranging from relatively mild headaches, skin rashes, eye irritation, and general flu-like symptoms to more serious chemical burns, paralysis, and even death. Chronic and delayed-onset illnesses such as cancer may only appear years after repeated exposure to small doses of a pesticide. Under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), EPA is responsible for ensuring that pesticides, when properly used, do not have any unreasonable adverse effects on the environment (any unreasonable risk to man or the environment, taking into account the economic, social, and environmental costs and benefits of the use of any pesticide). The act authorizes EPA to register pesticide products, specify the terms and conditions of their use before they are marketed, and remove unreasonably hazardous pesticides from the marketplace. Thus, registrations are basically licenses for specified uses of pesticide products. The act also requires that EPA reassess and reregister thousands of older pesticide products on the basis of current scientific standards. The process requires the pesticides' registrants to complete studies of various health and environmental effects, which are then reviewed by EPA to determine whether the products can be reregistered and thus remain on the market. Section 6(a)(2) of FIFRA also requires that registrants of pesticides report to EPA any additional factual information that they may obtain about unreasonable adverse effects that their registered pesticides have on the environment. According to EPA, the additional information on adverse effects that the registrants must report includes toxicology studies, human epidemiological and exposure studies, and efficacy studies, as well as incidents of pesticide exposure. In addition, the act requires that EPA monitor, among other things, the extent to which humans, animals, and the environment are incidentally exposed to pesticides, trends over time, and the sources of contamination. According to EPA, the data on incidents of pesticide exposure often augment the extensive studies performed by registrants as part of reregistration. This review focused on the data on incidents of exposure reported to EPA. When EPA identifies risks during its review of data on incidents, the agency may initiate one or more actions. These actions include restricting pesticide uses by placing specific instructions for use on the product's label (for example, requiring protective equipment), canceling specific uses of the pesticide, and/or canceling the pesticide's registration, thus removing the pesticide from the marketplace. From 1978 through 1981, EPA coordinated and collected information on incidents of pesticide exposure through its Pesticide Incident Monitoring System. The system's reports originated from registrants and from sources such as state and local agencies, poison control centers, health clinics, and hospitals that provide this information voluntarily. After this system was eliminated because of funding cuts, EPA continued to receive reports of incidents involving pesticides from registrants and from the voluntary sources. However, the agency did not have an automated system for monitoring data on such incidents until 1992, when it developed the Incident Data System to organize and track data originating from both pesticide registrants and the voluntary sources. This system stores data on incidents involving humans, domestic animals, wildlife (fish, birds, and mammals), and groundwater and surface water. Although most--about 87 percent, according to an Office of Pesticide Programs official--of the reports on incidents in EPA's system come from registrants, EPA also receives supplementary data from voluntary sources. FIFRA does not require states or sources other than registrants to collect or submit data on exposures. However, some states have established mandatory reporting regulations specifically for pesticide-related illnesses. EPA currently receives data on incidents routinely from five of these states--either directly or indirectly. California and Washington voluntarily send annual summary reports to EPA directly, while the agency receives quarterly reports on incidents in New York, Oregon, and Texas from the National Institute of Occupational Safety and Health, which collects data from these states. According to an EPA health statistician, other states may report some data on incidents to EPA, but not routinely. Written reports on incidents are forwarded to a single location at EPA headquarters, where they are cataloged and screened to determine whether they warrant detailed attention and/or consideration in registration or reregistration reviews. Aggregate reports are periodically generated from the data entered into the computerized system to determine if patterns are emerging that could cause concern. However, EPA has a backlog of data to be entered into the Incident Data System, thus limiting the effective use of the data it receives. Although the agency currently has a number of people involved in collecting and analyzing data on pesticide incidents, only a portion of each individual's work time is spent dealing with incidents, and no one has been assigned full-time to data collection efforts such as entering data into the system. Since the system became operational in June 1992, EPA has received about 12,575 reports. While about 8,125 of the reports had been entered into the system as of April 1995, information on about 3,250 incidents had not yet been entered because of limited staff resources. Another estimated 1,200 reports, which the registrants say contain confidential information, will not be entered into the system until the agency determines the validity of these claims. According to EPA staff, data on incidents of exposure played a significant part in 19 instances in which the agency took measures to protect the public health between 1989 and 1994. For example, after analyzing data from emergency rooms, hospitals, and poison control centers, the agency determined that most uses of arsenical (arsenic-based) ant baits could no longer be used in homes because of the potential high risk to children. In another instance, EPA, after reviewing cases involving the deaths of two individuals who died when they entered structures treated with methyl bromide, required that the product's label be revised to extend the period before people are allowed to reenter a treated area. In a third case, EPA determined that many reports of adverse reactions to pet care products likely resulted from misuse of the product or accidental exposure. Specifically, it appeared that some animals and humans had reacted adversely as a result of overdoses or repeated applications at too frequent intervals, or simultaneous applications of multiple pesticide products to pets and their environment. In several incidents, cats were injured by pet care products intended for dogs only. In this case, the aggregate number of incidents and other data in the Incident Data System on all pet care products led EPA to draft a proposed Pesticide Regulation Notice. EPA intends for the proposed notice to provide registrants of pesticide products with instructions on how a product's label should be changed to reflect the proper intervals for repeated use of the product and to restrict the use of the product to animals for which it was specifically intended. At the time of our review, the proposed notice had not been finalized. (App. I lists other examples of actions that EPA has taken using data on incidents involving nonagricultural pesticides.) Although EPA has been able to take some actions using data on incidents of exposure, the data the agency receives may not always be sufficient and its ability to assess risk and take action based on such data may be limited. The reports on incidents that EPA receives from registrants, as well as some of the voluntary reports such as those received from states, often vary in detail and lack key information needed to assess risk. For example, the reports frequently lack information on what pesticide caused the incident, how the exposure occurred, and what symptoms the victim suffered. EPA believes this type of information is essential in assessing risks and thus determining whether the label on a product should be changed or its use restricted or cancelled. Also, EPA cannot be sure that the reports it receives from registrants and voluntary sources are representative of incidents of exposure occurring nationwide. In addition, according to experts involved in these issues, underreporting of such incidents is widespread because, among other things, health care professionals may not always be adequately trained to recognize pesticide poisoning. Although pesticide registrants are required to report to EPA any additional factual information on the unreasonable adverse effects of their registered pesticides, their incident reports vary in detail. Section 6(a)(2) of FIFRA, which requires the registrants to report to EPA, does not require specific information, and EPA does not require standardized formats. An official in EPA's Office of Pesticide Programs said that registrants interpret FIFRA's reporting requirements in a variety of ways. Also, some registrants report frequently, while others do not. In reviewing recent reports received by EPA, we found that some registrants do not always include important information such as whether the product was misused or how frequently the victim was exposed to a pesticide. For example, one registrant submitted several reports that identified the pesticide involved and described the symptoms suffered but did not mention whether the product was used according to the label's instructions or whether the victim was exposed to the pesticide once or repeatedly. EPA believes some reports may lack important data simply because the data was unavailable to the registrants, while other reports may exclude data due to registrant interpretation of reporting requirements. The data that the states provide to EPA voluntarily also frequently lack important information, such as whether the product was misused, whether the victim was repeatedly exposed to the pesticide, what symptoms the victim suffered, how the exposure occurred, and--in some cases--what pesticide caused the incident. Information on laboratory tests, which would help confirm the exposure and health effects, is seldom present. In reviewing some of the data received by EPA, we found that although two states, in their 1994 quarterly reports, summarized the number of pesticide-related incidents, they did not provide detailed information about the exposures. One state reported 11 occupational (work-related) pesticide poisonings for the quarter, of which 3 were confirmed (that is, cause and effect had been determined), but did not disclose the names of the pesticides involved or other details of the exposures. Another state's quarterly report summarized several incidents of occupational pesticide poisonings in that state but revealed the name of only one pesticide. The report indicated that state agencies were further investigating some incidents to determine what action should be taken. Although EPA believes that any information about pesticide exposures can be useful, without some of the significant details about an incident of exposure EPA is unable to identify trends or patterns among pesticides that cause problems, assess their potential risks, or take corrective action. When the information EPA receives from the registrants, as well as voluntary sources such as states, does not have much of the data needed for assessing risk, it is of limited use. In this connection, officials in the Office of Pesticide Programs emphasized that FIFRA does not mandate that the states have mechanisms for collecting data on incidents and does not require states to report incidents to EPA. The officials also said that although EPA receives some data from states, the agency does not depend on the states for reports of incidents. Reports on incidents of exposure that EPA receives from registrants and from voluntary sources may not be representative of incidents occurring nationwide. For example, the nation's poison control centers typically receive far more reports of exposure than EPA does. These centers recorded over 150,000 incidents of humans being exposed to pesticides in 1992-93. In contrast, about 12,575 incidents of humans and animals being exposed to pesticides have been reported to EPA since 1992. EPA has sometimes used data from a data base maintained by the American Association of Poison Control Centers, but the agency has generally not had funds to routinely pay the fees for such data. The association's data base contains considerable amounts of data on individual exposures, including the type of substance or product, age of the patient, means of exposure, symptoms, and type of treatment--if any--and the medical outcome. While the association publishes summary data annually in the September issue of the American Journal of Emergency Medicine, it charges a fee for detailed data. For example, exposure data on a single poison for 1990-93 would cost $4,400. Abstracts of individual case records, when available, are priced at $150. As an alternative to purchasing these data directly, however, EPA can require registrants to purchase the data when the agency determines that a pesticide poses a high risk to public health. In 1993, for example, EPA's Acute Worker Risk Strategy Work Group identified 28 chemicals as acutely toxic to agricultural workers--based on data from California, data on toxicity, and data on usage. In this case, EPA issued a data call-in noticerequiring the pesticides' registrants to submit data from the American Association of Poison Control Centers. Using data from California and from the poison control centers, EPA's worker risk group has proposed measures to reduce risk for aldicarb, azinphos-methyl, carbofuran, methamidophos, and methomyl pesticides. Apart from pesticide registrants, FIFRA does not give EPA authority to require individuals, states, or organizations to report exposure to or incidents involving pesticides to EPA. The voluntary nature of the data collection system is a major contributor to underreporting of incidents. However, underreporting also results from a lack of training within the medical community in recognizing pesticide poisonings and lack of familiarity with state reporting requirements. In our 1993 report on agricultural pesticides, we reported that state officials cited underreporting as a serious problem because, among other reasons, health care professionals lacked adequate training in recognizing and diagnosing pesticide-related illnesses and were unfamiliar with state reporting requirements and/or unwilling to report cases to state officials. State and federal officials indicated that even when reports were made, it was frequently difficult to verify incidents and determine their cause because of delays in reporting and a lack of information about the circumstances of these illnesses. While these reasons were cited for agricultural pesticides and farm workers, the same appears to be true for nonagricultural pesticides and consumers. For example, an EPA Health Statistician told us that he believed the medical community's incomplete understanding or recognition of pesticide poisonings was one reason why the data that EPA collected on incidents were not sufficient in helping the agency take the necessary action. With respect to health care professionals' familiarity with state reporting requirements, a toxicologist at the University of California at Berkeley reported that physicians in California--the state with the most comprehensive registry of pesticide-related illnesses in the nation--are often not aware that such illnesses must be reported to the appropriate local health officers. According to the report he coauthored, Preventing Pesticide-related Illness in California Agriculture, one-quarter of physicians surveyed in rural California did not know that suspected and confirmed pesticide-related illnesses must be reported to county health officers. EPA has recognized that its approach to data collection needs improvement, and in September 1994, its Office of Pesticide Programs established a work group to focus on potential improvements. This work group was established to develop a long-term plan for collecting, storing, manipulating, and using data on incidents. EPA recently completed the first phase of this effort, in which the work group identified the (1) critical and desirable data elements, (2) use and potential use of the data collected, (3) current and potential sources of data, and (4) gaps between the data EPA needs and the data it already has. A second phase--to identify potential improvements in data collection and analysis--will include identifying (1) how much different system configurations would cost, (2) who should have access to these systems, (3) whether one or more data collection systems are needed, (4) how the agency should be structured internally for the data collection system, and (5) who should operate the system. Further efforts by the work group will include exploring the potential for more routinely requiring registrants to purchase data from the poison control centers as part of specific projects. A December 1994 report by the work group indicated that additional phases may also be undertaken. Although the work group coordinator said the group plans to establish deadlines for the second phase, as of May 1995 EPA did not have a formal plan with milestones for completing any of the phases for this group's work or for implementing any improvements the work group identified. EPA has also proposed a new rule, which it calls the 6(a)(2) rule, aimed at improving the quality of the data on incidents the agency receives from pesticide registrants and making the processing of this information easier for the registrants and the agency. Although registrants are required under FIFRA to submit any factual data on adverse effects they may have, EPA is concerned that incidents may be underreported by the industry as a whole. The currently available guidance on reporting on incidents, developed in the 1970s, is not very detailed. On the basis of the proposed rule, registrants will be given specific regulatory requirements on what data they must report to EPA on incidents of exposure, when such data are available. For example, the specific information being requested in the proposed rule includes the name of the company submitting the information to EPA, the EPA registration (or identification) number of the pesticide involved, and a detailed summary including specific information about the incident being reported. EPA believes its new rule will clarify the registrants' responsibilities and should result in significantly greater numbers of reports on incidents. EPA expects the new rule to be finalized in 1995. In addition, officials from the Office of Pesticide Programs said that the office is considering a major reorganization as part of an effort to streamline operations and that options for managing information on incidents will be considered as part of this effort. Furthermore, EPA staff have been working with four companies that submit large numbers of reports on incidents of exposure to determine the feasibility of electronic submission of reports. Officials in the Office of Pesticide Programs believe that if the registrants put the data in a format compatible with the data in the agency's Incident Data System, staff will be able to enter these data directly into the system. The officials also said that they plan to ask these companies to consider electronically resubmitting reports they had previously submitted on paper. Eliminating the need to manually key these data into the system could help reduce most of the backlog. EPA believes this effort is a cost-effective method of improving its handling of incidents of exposure. While EPA has a system for collecting, reviewing, and acting on incidents of exposure to pesticides and has taken action on some data on incidents, the system does not currently ensure that EPA always has sufficient information to determine whether action to protect public health is necessary. Although EPA has been able to take some actions using its data on incidents, the agency may not be appropriately responding to all cases of adverse health effects caused by pesticide use. Better, more complete data on incidents involving pesticides would help EPA determine whether additional actions are necessary to protect public health. EPA has already begun to take some steps to improve its collection and analysis of data, and its work group is continuing to identify additional areas for improvements. We support the agency's efforts because they should lead to better management of data on incidents. Similarly, EPA's proposed 6(a)(2) rule should lead to an improvement in the quality of data submitted by registrants. We requested comments on a draft of this report from EPA. On June 12, 1995, we met with a section head, Policy and Special Projects Staff, Office of Pesticide Programs, to obtain the agency's comments on the draft report. During this meeting, we were provided with comments from the Director, Office of Pesticide Programs. EPA believes our report accurately explains that EPA regards data on incidents of exposure as an important supplement to laboratory studies, and is seeking ways to improve the quality and quantity of the data submitted to the agency, as well as for improved ways of managing and using the data in making regulatory decisions. EPA believes the draft report did not clearly state the importance of its proposed 6(a)(2) rule, which is to accomplish two significant objectives. First, the rule will explain to registrants exactly what facts EPA wants them to report. Secondly, the rule is intended to solve the perceived problem of underreporting by registrants due to lack of clear guidance in the form of an enforceable regulation. The agency pointed out that the proposed rule does not place new or additional requirements on registrants, but only clarifies what is already required under FIFRA. We agree that the rule is important for improving the quality of data on incidents. EPA was also concerned that in a period of serious resource constraints, it will be very difficult to make all the improvements to its collection of data on incidents that would be desirable. As noted in our report, acquiring adequately detailed information from nonregistrant sources can cost substantial amounts of money. EPA believes that managing increased numbers of reports will require the investment of scarce funds and personnel in data management systems. In its comments, EPA said that although electronic data submission and other reporting innovations may help to achieve economies, some improvements may not be possible at all if resources are cut significantly in the future. EPA also provided some technical comments, and we have made changes in appropriate sections of our report to accommodate these comments. Our objectives were to determine whether EPA collects data on incidents of exposure to pesticides and takes action based on these data, and whether such data are sufficient to allow the agency to determine if unacceptable risks to public health are occurring. To accomplish these objectives, we interviewed officials from EPA's Office of Pesticide Programs, including the Chief, Special Projects and Coordination; Incident Data Officer for Humans and Domestic Animals; Coordinator, Ecological Incident Monitoring; Chief, Certification and Training Branch; and Section Head of Special Review and Groundwater. We also reviewed documents and records from EPA's Incident Data System. To obtain views on incidents of pesticide exposure from others outside of EPA, we discussed the adverse health effects of nonagricultural pesticides with representatives of industry and of environmental and other nonprofit organizations. In addition, we visited California, Florida, and Oregon, and collected and reviewed these states' data on incidents of exposure. We selected these states because they collect data on such incidents and because two of these states--California and Florida--have climates in which a greater use of nonagricultural pesticides is likely to be required. We conducted our review between March 1994 and May 1995 in accordance with generally accepted government auditing standards. As arranged with your office, we plan no further distribution of this report until 10 days after the date of this letter unless you publicly announce its contents earlier. We will then send copies to the Administrator of EPA. We will also make copies available to others on request. Please call me at (202) 512-4907 if you or your staff have any questions. Major contributors to this report are listed in appendix II. While EPA does not routinely receive complete data on incidents involving nonagricultural pesticides, it sometimes receives information on specific cases that is detailed enough to assist it in taking actions to protect public health. Table I.1 lists examples of EPA's use of such data to take actions between 1989 and 1994. Data collected, used, and/or analyzed by EPA EPA reviewed data from hospitals' emergency rooms, newspaper clippings generated by manufacturers, and field information from state agencies to identify the types and severity of poisonings that could result from the use of chlorine in swimming pools. EPA restricted the use of chlorine in swimming pools. Through an increase in the number of incidents reported by the National Pesticide Telecommunications Network,EPA identified a public perception of risk from lawn care pesticides. EPA developed guidance for the states on how to establish posting and notification programs for lawn care products. Through its Incident Data System, EPA identified a large number of pets being adversely affected by consumers' misuse of these products. The data also revealed that human health was being adversely affected. EPA has completed a Pesticide Registration Notice instructing registrants to clarify warnings and instructions on the products' labels to prevent misuse by consumers. Using information collected from EPA's regional offices and from state agencies, EPA found cases in which certain insect repellents were causing adverse reactions. EPA distributed a physician's advisory through the Centers for Disease Control and poison centers as well as a consumer brochure on proper use. On the basis of (1) reports on a child with acrodynia, (2) over 40 publications on the relationship between that disease and mercury, and (3) levels of mercury that the Centers for Disease Control found in household air and occupants' urine in Detroit homes, EPA assessed the risk of acrodynia resulting from the use of mercury in household paint. EPA canceled all uses of mercury in household paints. EPA used data from hospitals' emergency rooms, hospitals, a poison control center, and the state of Texas to determine that this pesticide product had a small margin of safety for young children. EPA canceled most uses of sodium arsenate in household ant bait. (continued) Data collected, used, and/or analyzed by EPA A parent informed EPA of an incident involving a child who overcame a child-resistant package containing 2 percent disulfoton powder (a pesticide used on ornamental plants and house plants). EPA required the manufacturer to retest the product's child-resistant packaging for efficacy. EPA learned of an investigation of two cases (one in California and one in Iowa) in which two people died after reentering structures treated with methyl bromide. EPA required revisions to the pesticide's label requiring longer ventilation periods before people reentered treated structures. Data reviewed by a poison control center permitted EPA to determine how much boric acid powder or how many tablets resulted in poisonings of children. EPA required revisions to the product's label to restrict the number of tablets used in one application of the product. Mercury was added to paints to preserve the paint in the can by controlling the growth of microbes, principally bacteria, and to preserve the paint from mildew attack after it was applied to an exterior surface. Lawrence J. Dyckman, Associate Director J. Kevin Donohue, Assistant Director Raymond M. Ridgeway, Evaluator-In-Charge Jennifer W. Clayborne, Evaluator Phyllis Turner, 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. 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 Environmental Protection Agency's (EPA) monitoring of human exposures to pesticides, focusing on whether EPA: (1) collects data on exposure arising from the use on nonagricultural pesticides; (2) takes action in response to potential health risks from such exposure; and (3) receives sufficient information to assess whether unacceptable risks are occurring. GAO found that: (1) EPA has collected pesticide exposure data from pesticide registrants and public and private entities since the 1970s and, in 1992, it implemented a computerized system to organize and track such data; (2) EPA has not assigned full-time staff to data collection and processing; therefore, the system has a data entry backlog, which limits its effectiveness; (3) EPA acted in 19 instances between 1989 and 1994 to protect the public from pesticide risks; (4) EPA often cannot assess whether a pesticide poses an unacceptable health risk, since incident reports frequently lack key data, may not be representative, or are not submitted; (5) an EPA work group is developing a long-term plan to collect and manage exposure data, but it has yet to develop a plan for putting the most cost-effective improvements into effect; (6) to improve the number and quality of exposure reports, EPA has proposed a rule that requires pesticide registrants to submit more detailed data on exposure incidents and clarifies the registrants' responsibilities; (7) EPA is determining the feasibility of having registrants who submit large numbers of reports to submit them electronically; and (8) the current exposure monitoring system includes data on both agricultural and nonagricultural pesticides, since EPA collects and processes the same information for those chemicals.

To date, the Congress has designated 24 national heritage areas, primarily in the eastern half of the country. Generally, national heritage areas focus on local efforts to preserve and interpret the role that certain sites, events, and resources have played in local history and their significance in the broader national context. Heritage areas share many similarities--such as recreational resources and historic sites--with national parks and other park system units but lack the stature and national significance to qualify them as these units. The process of becoming a national heritage area usually begins when local residents, businesses, and governments ask the Park Service, within the Department of the Interior, or the Congress for help in preserving their local heritage and resources. In response, although the Park Service currently has no program governing these activities, the agency provides technical assistance, such as conducting or reviewing studies to determine an area's eligibility for heritage area status. The Congress then may designate the site as a national heritage area and set up a management entity for it. This entity could be a state or local governmental agency, an independent federal commission, or a private nonprofit corporation. Usually within 3 years of designation, the area is required to develop a management plan, which is to detail, among other things, the area's goals and its plans for achieving those goals. The Park Service then reviews these plans, which must be approved by the Secretary of the Interior. After the Congress designates a heritage area, the Park Service enters into a cooperative agreement with the area's management entity to assist the local community in organizing and planning the area. Each area can receive funding--generally limited to not more than $1 million a year for 10 or 15 years--through the Park Service's budget. The agency allocates the funds to the area through the cooperative agreement. As proposed, S. 2543 would establish a systematic process for determining the suitability of proposed sites as national heritage areas and for designating those areas found to be qualified. In our March 2004 testimony, we stated that no systematic process exists for identifying qualified candidate sites and designating them as national heritage areas. We noted that, while the Congress generally has made designation decisions with the advice of the Park Service, it has, in some instances, designated heritage areas before the agency has fully evaluated them. Specifically, the Congress designated 10 of the 24 existing heritage areas without a thorough Park Service review of their qualifications and, in 6 of the 10 cases, the agency had recommended deferring action. S. 2543, however, would create a more systematic process that would make the Congress' designation of a heritage area contingent on the prior completion of a suitability-feasibility study and the Secretary's determination that the area meets certain criteria. In addition, under S. 2543, the Secretary could recommend against designation of a proposed heritage area based on the potential budgetary impact of the designation or other factors. Provisions in S. 2543 identify a number of criteria for the Secretary to use in determining a site's suitability and feasibility as a national heritage area, including its national significance to the nation's heritage and whether it provides outstanding recreational or educational opportunities. S. 2543 defines a heritage area as an area designated by the Congress that is nationally significant to the heritage of the United States and meets the other criteria specified in the bill. Further, S. 2543 defines national significance as possessing unique natural, historical, and other resources of exceptional value or quality and a high degree of integrity of location, setting, or association in illustrating or interpreting the heritage of the United States. Despite these very specific definitions, however, the criteria outlined in S. 2543 for determining an area's suitability are very similar to those currently used by the Park Service. Our March 2004 testimony pointed out that these criteria are not specific enough to determine areas' suitability. For example, one criterion states that a proposed area should reflect "traditions, customs, beliefs, and folk life that are a valuable part of the national story." These criteria are open to interpretation and, using them, the agency has eliminated few sites as prospective heritage areas. As we stated in March, officials in the Park Service's Northeast region, for example, believe the criteria are inadequate for screening purposes. The Park Service's heritage area national coordinator believes, however, that the criteria are valuable but that the regions need additional guidance to apply them more consistently. The Park Service has recently developed guidance for applying these criteria, which will help to clarify how both the existing criteria and the criteria proposed in S. 2543 could be applied to better determine the suitability of a prospective heritage area. S. 2543 would impose some limits on the amount of federal funds that can be provided to national heritage areas through the National Park Service's budget. In our March 2004 testimony, we stated that from fiscal years 1997 through 2002 about half of heritage areas' funding came from the federal government. According to data from 22 of the 24 heritage areas, the areas received about $310 million in total funding. Of this total, about $154 million came from state and local governments and private sources and another $156 million came from the federal government. Over $50 million was dedicated heritage area funds provided through the Park Service, with another $44 million coming from other Park Service programs and about $61 million from 11 other federal sources. We also pointed out that the federal government's total funding to these heritage areas increased from about $14 million in fiscal year 1997 to about $28 million in fiscal year 2002, peaking at over $34 million in fiscal year 2000. Table 1 shows the areas' funding sources from fiscal years 1997 through 2002. S. 2543 restricts the funding for heritage areas that is allocated through the Park Service's budget to $15 million for each fiscal year. Of this amount, not more than $1 million may be provided to an individual area in a given fiscal year and not more than $10 million over 15 years. For any fiscal year, the costs for oversight and administrative purposes cannot exceed more than 5 percent of the total funds. While this provision restricts the amount of federal funds passing from the Park Service--the largest provider of federal funds--to the heritage areas, these areas can obtain funding from other federal agencies as well. In March, we also pointed out that, generally, each area's designating legislation imposes sunset provisions to limit the amount of federal funds provided to each heritage area. However, since 1984, five areas that reached their sunset dates had their funding extended. S. 2543 establishes a fixed time frame after which no additional funding, except for technical assistance and administrative oversight, will be provided. Specifically, it states that the Secretary of the Interior can no longer provide financial assistance after 15 years from the date that the local coordinating, or management, entity first received assistance. S. 2543 includes a number of provisions that could enhance the Park Service's ability to hold national heritage areas accountable for their use of federal funds. In March, we stated that the Park Service oversees heritage areas' activities by monitoring their implementation of the terms set forth in cooperative agreements. These terms, however, did not include several key management controls. That is, the agency had not (1) always reviewed areas' financial audit reports, (2) developed consistent standards for reviewing areas' management plans, and (3) developed results-oriented goals and measures for the agency's heritage area activities, or required the areas to adopt a similar approach. Park Service officials said that the agency has not taken these actions because, without a program, it lacks adequate direction and funding. We recommended that, in the absence of a formal heritage area program within the Park Service, the Secretary of the Interior direct the Park Service to develop well-defined, consistent standards and processes for regional staff to use in reviewing and approving heritage areas' management plans; require regional heritage area managers to regularly and consistently review heritage areas' annual financial reports to ensure that the agency has a full accounting of their use of funds from all federal sources; develop results-oriented performance goals and measures for the agency's heritage area activities, and require, in the cooperative agreements, that heritage areas adopt such a results-oriented management approach as well. S. 2543 takes several steps that will enhance accountability. In this regard, S. 2543 establishes a formal program for national heritage areas to be administered by the Secretary of the Interior. By establishing this program, the bill would provide the Park Service with the direction and funding that agency officials believe they need to impose management controls on their own and heritage areas' activities. Furthermore, S. 2543 includes a number of provisions that address the concerns we raised in March. First, the bill establishes a schedule and criteria for reviewing and approving or disapproving heritage areas' management plans. The Secretary must approve or disapprove the management plan within 180 days of receiving it. If disapproved, the Secretary must advise the local coordinating entity in writing of the reason for disapproval and may make recommendations for revision. After receiving a revised management plan, the Secretary must approve or disapprove the revised plan within 180 days. In addition, the bill identifies criteria that the Secretary is to use in determining whether to approve an area's plan. This is a positive step towards establishing the well-defined, consistent standards and processes for reviewing and approving areas' management plans that we recommended in March. S. 2543 also requires that the management plans include information on, among others, performance goals, the roles and functions of partners, and specific commitments by the partners to accomplish the activities outlined in the management plan. Furthermore, to ensure better accountability, the local coordinating entity must submit an annual report to the Secretary for each fiscal year for which the entity receives federal funds. This report must specify, among other things, the local coordinating entity's performance goals and accomplishments, expenses and income, amount and sources of matching funds, amounts and sources of leveraged federal funds, and grants made to any other entity during the fiscal year. While provisions contained in S. 2543 address some of the issues we raised in our March testimony, they do not require that the Park Service consistently review areas' financial audit reports or develop results- oriented goals and measures for the agency's heritage area activities as we recommended in March. We continue to believe that these are important management controls that are necessary to ensure effective oversight and accountability. S. 2543 includes provisions to ensure that property owners' rights and land use are not restricted by the establishment of national heritage areas. In our March testimony, we stated that national heritage areas do not appear to have affected property owners' rights. In fact, the designating legislation of 13 areas and the management plans of at least 6 provide assurances that such rights will be protected. However, property rights advocates are concerned about the effects of provisions in some management plans that encourage local governments to implement land use policies that are consistent with the heritage areas' plans. Some advocates are concerned that these provisions may allow the heritage areas to indirectly influence zoning and land use planning in ways that could restrict owners' use of their property. S. 2543 provides property owners the right to refrain from participating in any planned project or activity conducted within the national heritage area. Furthermore, it does not require any property owner to permit public access, nor does it modify public access under any other federal, state, or local law. It also does not alter any adopted land use regulation, approved land use plan, or other regulatory authority of any federal, state, or local authority. The growing interest in creating new heritage areas has raised concerns that their numbers may expand rapidly and significantly increase the amount of federal funds supporting them. A significant increase in new areas would put increasing pressure on the Park Service's resources. Therefore, it is important to ensure that only those sites that are most qualified are designated as heritage areas. However, as we noted in March, no systematic process for designating these areas exists, and the Park Service does not have well-defined criteria for assessing sites' qualifications or provide effective oversight of the areas' use of federal funds and adherence to their management plans. As a result, the Congress and the public cannot be assured that future sites will have the necessary resources and local support needed to be viable or that federal funds supporting them will be well spent. Park Service officials pointed to the absence of a formal program as a significant obstacle to effective management of the agency's heritage area efforts and oversight of the areas' activities. As a result, the Park Service is constrained in its ability to determine both the agency's and areas' accomplishments, whether the agency's resources are being employed efficiently and effectively, and if federal funds could be better utilized to accomplish its goals. Several of the provisions in S. 2543 represent positive steps towards addressing the concerns we raised in March. In particular, by establishing a formal program, the bill would remove the obstacle to effective management and oversight identified by agency officials. Furthermore, by establishing a more systematic process for designating heritage areas, S 2543's provisions can help to ensure that only the most qualified sites become heritage areas. In addition, by placing a $15 million per year cap on funding to the heritage areas through the Park Service, the bill limits the federal government's funding commitment to these areas. Finally, provisions in S. 2543 would enhance the Park Service's ability to oversee and hold areas accountable for their use of federal funds by establishing criteria for reviewing and approving areas' management plans and by requiring heritage areas to annually report on performance goals and accomplishments. To ensure greater accountability for the use of federal funds, the Congress may wish to consider amending S. 2543 by adding provisions directing the Secretary to (1) review heritage areas' annual financial reports to ensure that the agency has a full accounting of heritage area funds from all federal sources, and (2) develop results-oriented performance goals and measures for the Park Service's overall heritage area program. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittee may have. For more information on this testimony, please contact Barry T. Hill at (202) 512-3841. Individuals making key contributions to this testimony included Preston S. Heard, Roy K. Judy, and Vincent P. Price. 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 Congress has established, or "designated," 24 national heritage areas to recognize the value of their local traditions, history, and resources to the nation's heritage. These areas, including public and private lands, receive funds and assistance through cooperative agreements with the National Park Service, which has no formal program for them. They also receive funds from other agencies and nonfederal sources, and are managed by local entities. Growing interest in new areas has raised concerns about rising federal costs and the risk of limits on private land use. GAO was asked to comment on how provisions of S. 2543 might affect issues identified in GAO's March 2004 testimony addressing the process for (1) designating heritage areas, (2) determining the amount of federal funding to these areas, (3) overseeing areas' activities and use of federal funds, and (4) determining the effects, if any, they have on private property rights. Provisions of S. 2543 would establish a systematic process for identifying and designating national heritage areas, addressing many of the concerns identified in GAO's March 2004 testimony. At that time, GAO reported that no such systematic process exists, noting that the Congress has, in some instances, designated heritage areas before the Park Service has fully evaluated them. S. 2543 contains provisions that would require that a suitability study be completed and the Park Service determine the area meets certain criteria before the Congress designates a heritage area. While the bill defines heritage areas more specifically in terms of their national significance, the criteria outlined in S. 2543 will benefit from guidance that the Park Service has recently developed to guide the application of the criteria. This guidance will improve the designation process. Provisions of S. 2543 would limit the amount of federal funds that can be provided to heritage areas through the Park Service's budget. In March 2004, GAO testified that from fiscal years 1997 through 2002 about half of heritage areas' funding came from the federal government. Specifically, for 22 of the 24 heritage areas where data were available, $156 million of the areas' $310 million in total funding came from the federal government. Of this, over $50 million came from Park Service funds dedicated for this purpose, $44 million from other Park Service programs, and about $61 million from 11 other federal sources. S. 2543 would restrict annual dedicated Park Service funding for heritage areas to $15 million. Individual areas may not receive more than $1 million in a given fiscal year and $10 million over 15 years. Furthermore, S. 2543 includes provisions that could enhance the Park Service's ability to hold heritage areas accountable for their use of federal funds. In this regard, S. 2543 (1) establishes a program that would provide the Park Service with the direction and funding needed to manage the agency's and the heritage areas' activities; (2) establishes a schedule and criteria for reviewing and approving heritage areas' management plans; (3) identifies criteria for use in reviewing areas' plans; (4) requires that the plans include information on, among other things, performance goals and the roles and functions of partners; and (5) requires areas to submit annual reports specifying, among other things, performance goals and accomplishments, expenses and income, and amounts and sources of funds. GAO has identified potential amendments to S. 2543 that would further enhance areas' accountability. S. 2543 includes provisions that address some of the concerns GAO identified in March with regard to heritage areas' potential restrictions on property owners' rights and land use. For example, S. 2543 allows property owners to refrain from participating in any planned project or activity within the heritage area. Furthermore, the bill does not require any owner to permit public access to property and does not alter any existing land use regulation, approved land use plan, or other regulatory authority.

Before commercialization, air navigation services under government control faced increasing strain. Many were underfunded, as evidenced by air traffic controller wage freezes and insufficient funds to replace aging technologies. In some instances, the country as a whole faced widespread fiscal problems and the commercialization of air navigation services was simply part of a larger movement to reform government enterprises such as rail, telecommunications, and electricity. With commercialization, the government typically retains full or partial ownership of the air navigation system and continues to regulate operational safety, but an independent ANSP is responsible for operating the system. The independent ANSP is subject to corporate financial and accounting rules and, in line with today's current management theories, is generally designed as a performance-based organization--that is, an organization that develops strategies, goals, and measures and gathers and reports data to demonstrate its performance. In the five countries whose air navigation services we reviewed, the ANSP continued to provide nationwide services after commercialization and, with certain exceptions, remained the sole provider of air navigation services. Each ANSP offers en route, approach control, and terminal air traffic services. However, in some cases, an ANSP may not be the sole provider of approach control and terminal services in a country. Although technical definitions may vary slightly among ANSPs, these services broadly correspond to the services provided in U.S. air traffic centers, approach control centers, and towers. All but Germany's DFS also offer oceanic air navigation services. All five ANSPs are responsible for providing air traffic services to both civil and military aviation. In addition, the ANSPs may offer other air-navigation-related services, such as meteorological services, fire and rescue, training, and consulting. The ANSPs also charge for these services. Discussions about the commercialization of air navigation services often use a number of terms interchangeably. Among these terms are restructuring, privatization, outsourcing, and corporatization, as well as commercialization. The Civil Air Navigation Services Organization (CANSO), which represents the interests of ANSPs worldwide, uses the term corporatization. Others, such as the International Civil Aviation Organization (ICAO), which establishes international civil aviation standards and recommends practices and procedures for ANSPs, use the term commercialization. Some note that an organization can be "commercialized" but not "corporatized" (i.e., established under prevailing company law). For this statement, we will use "commercialization." The five commercialized ANSPs that we reviewed have a number of common characteristics: All operate as businesses rather than as government organizations, all focus on safety, and all are largely monopoly providers that are subject to some form of economic review or guidelines for setting prices. All five commercialized ANSPs operate as businesses, although they differ somewhat in their ownership structures. (See table 1.) Three of the five-- Airservices Australia, Airways Corporation of New Zealand, and DFS--are currently state-owned corporations--that is, companies wholly owned by the government. The UK's National Air Traffic Services (NATS) is a public- private partnership, that is, a cooperative venture between the public and private sectors that is designed to meet defined public needs with the risks and rewards divided between both parties. The government holds the largest share of NATS (49 percent), and the remaining shares are divided among a consortium of seven UK airlines (42 percent), NATS staff (5 percent), and a private airport company (4 percent). By 2006, Germany plans to change the ownership of DFS, selling 74.9 percent of its equity to private investors and reorganizing it as a public-private partnership, along the lines followed in the UK. NAV CANADA is a nonshare capital, private corporation--that is, it has "members" instead of shareholders. These members represent the airline industry, the government, and general and business aviation, and they also include employees such as air traffic controllers and engineers. Each ANSP makes and carries out its own strategic, operating, and financial decisions. A supervisory board oversees policy making and operations and, when applicable, has fiduciary responsibilities to shareholders. The members of this board may represent key stakeholders, such as the airlines, employees, general aviation, and the national government. An executive officer implements the board's policies and is in turn, accountable to the board. Individual business units within the ANSP report to the executive officer and are directly responsible for various aspects of the ANSP's day-to-day operations. As commercial organizations, the ANSPs follow corporate practices. Each ANSP has established performance measures and gathers and reports financial and other performance data. Each ANSP also publishes an annual report, which makes financial information available to the public to ensure transparency. Financial statements are typically subject to third-party audit to ensure that adequate accounting records have been maintained and that internal controls have prevented and detected any fraud and error in the accounting policies and estimates. In addition, the UK and Germany report their data to EUROCONTROL's Performance Review Commission, which collects data for benchmarking and publishes comparative studies of members' performance. Before commercialization, two of the five ANSPs "purchased" the ANSP assets from their government. NAV CANADA negotiated a selling price with the Canadian government, rather than going through a formal competitive bidding process, and purchased the air navigation system in 1996 for C$1.5 billion. In the UK, according to information from the National Audit Office, a collection of seven UK airlines known as "The Airline Group" provided PS795 million of funds, partly from its own resources (PS65 million) and from a loan taken out with a consortium led by four main banks. The group used these funds to acquire NATS and meet associated transaction costs, leaving PS3.5 million of cash in the business. In total, the government received PS758 million in cash proceeds from the transaction. All five commercialized ANSPs rely on user charges as their primary source of revenue and on private capital markets for additional funding. Before commercialization, governments funded air traffic control services through annual appropriations from their national government. All five ANSPs collect and manage their own revenues, charging fees for services. Their air navigation service fees are based on ICAO's cost recovery principles, which call for recovering the ANSP's operating costs. Despite some variation across ANSPs, the fees are generally as follows: The air navigation fees cover operating and capital costs associated with both en route and terminal services. These charges are based on a weight- distance formula. If applicable, ANSPs also levy charges for oceanic control. ANSPs may also charge for tower-related services. However, not all ANSPs are the sole providers of tower services. In the UK and Germany, for example, private firms may provide tower services. These tower charges are distinct from the landing fees typically charged by airports, which are usually weight-based. ANSPs may charge general aviation operators a flat fee for services or additional fees in particular circumstances rather than charging the weight-distance fees typically assessed to larger air carriers. ANSPs may also charge additional fees, as applicable, for other services, such as meteorological, aeronautical information, training, and consulting services. The five ANSPs vary in their treatment of any operating profits or losses. If an ANSP generates revenues from charges in excess of its costs (i.e., operating profits), it may rebate them to the users, lower the charges for the next year, pay some form of dividend to shareholders, or retain them in reserve to protect against future losses. If costs exceed revenues, ANSPs use different strategies to meet those shortfalls. For example, NAV CANADA established a "rate stabilization fund," which it used to store revenues when the aviation industry was healthy. The fund could then be used to cover costs and keep rates stabilized when the industry was ailing. The fund was capitalized by operating profits earned before September 11, 2001, but depleted following the economic downturn caused by the events of September 11 and the SARS outbreak of 2003. In 2003, the rate stabilization fund had reached a cumulative deficit of C$116 million. According to NAV Canada's 2004 annual report, the C$116 million deficit has been reduced to C$32 million. In the UK, NATS, which experienced a major decline in transatlantic traffic after September 11, first obtained a L60 million short-term loan from its lending banks and then refinanced, bringing in a new equity partner (BAA, plc.). To pay for capital projects, the five ANSPs can either use current operating revenues or borrow funds. Before commercialization, the ANSPs relied on annual appropriations for capital projects; now, all five can borrow funds through access to private capital and debt financing. For example, NAV CANADA can seek debt financing in private markets. NAV CANADA has a borrowing capacity of C$2.9 billion. In Germany, DFS mainly finances its capital expenditures by drawing on a capital market program, which issues short-, medium- , or long-term notes (i.e., debt issuance and commercial paper) each amounting to EUR 500 million for a total of EUR 1 billion to private investors in the market. DFS can also draw on an annual credit line of EUR161 million from its bank. Stakeholders, including employees, as well as the airlines, general aviation operators, airports, the government, the public, and others, may be involved in their ANSP through a variety of mechanisms. In Europe, for example, the Single European Sky initiative directs member states to establish a consultation mechanism for involving stakeholders. Germany and the UK have followed this direction by including stakeholder representatives on their ANSP's board of directors. For example, in Germany, DFS employees, government ministries, and the private sector are represented on a supervisory board. In the UK, government appointees, the airlines, and BAA, plc. (the airport consortium) are represented on NATS's board. In Australia, the aviation community (e.g., the airports, airlines, safety authorities, and others) has a role in the air traffic procurement process through the Australian Strategic Air Traffic Management Group (ASTRA). For all five commercialized ANSPs, safety remains the primary goal. In some countries, government policy requires that the ANSP consider safety in any and all decisions affecting operations and service. For example, in Germany, legislation requires DFS to observe ICAO's standards and recommended safety practices, as well as adhere to the objectives and policies of international organizations where the German government is represented, such as EUROCONTROL. Similarly, in Canada, legislation requires NAV CANADA to maintain a fixed level of safety. Under the Civil Air Navigation Services Commercialization Act, the Minister of Transport has the authority to direct NAV CANADA to maintain or increase levels of service in the interest of safety. Although it can alter operations in accordance with business principles, it must demonstrate that the changes meet the required level of safety through an aeronautical risk assessment. All five ANSPs are subject to external safety regulation. A separate authority conducts safety regulation and issues relevant certifications or licenses to air traffic controllers and technicians. In New Zealand, for example, the Civil Aviation Authority (CAA) is an independent regulatory authority that establishes civil aviation safety and security standards and monitors adherence to those standards. CAA carries out accident and incident investigations and uses information from these investigations to establish an industrywide safety picture and develop safety initiatives ranging from education campaigns to increased monitoring and regulatory action. All five selected ANSPs have established formal safety programs. For example, Airservices Australia employs a surveillance model, which includes incident investigation, trend analysis, system review, and internal audit. Similarly, DFS and NATS apply a systematic Safety Management System to all of its operational activities. The system forms the basis for risk assessment, safety assurance, safety control and safety monitoring through standards that comply with national and international obligations. Each of the five commercialized ANSPs is its country's sole provider of en route navigation services. There is no opportunity for more than one organization to provide competing air navigation services. Thus, operators cannot choose alternative providers by changing routes. To forestall the abuse of monopoly position and address concerns about the level of prices or charges, the five ANSPs are subject to the following: In the UK, the Civil Aviation Authority (CAA) exercises economic regulation over NATS. CAA's Economic Regulation Group sets price caps for 5-year periods, basing them generally on the retail price index and the group's own analyses of allowances for NATS' estimated operating and capital costs. The Australian Competition and Consumer Commission (ACCC), an independent commonwealth authority, monitors primarily monopolistic public and private service industries, including Airservices Australia. ACCC oversees Airservices Australia's process of setting user fees for air traffic services and decides to accept or reject price changes on the basis of public consultation and its own evaluation of Airservices' pricing proposals. Airways Corporation of New Zealand operates under a memorandum of understanding with its airline users. Under this memorandum, Airways uses the principle of "Economic Value Added" (EVA) to self-regulate its pricing. EVA is the difference between net operating profit after taxes minus the cost of capital. EVA above a certain level is returned to users in the form of a rebate. The German Transport Ministry reviews and approves any changes in user fees, but does not independently evaluate the price-setting process or pricing changes. According to the Transport Ministry, Germany plans to create an independent economic regulatory authority by next year to comply with the requirements of the forthcoming Single European Sky initiative. The Canadian Transportation Agency (CTA) reviews the price-setting process against an established set of principles. However, CTA does not respond to user grievances about existing prices. NAV CANADA is legislatively required to place all revenues in excess of costs in its rate stabilization fund. Based on information from each of the ANSPs we reviewed, following commercialization, air navigation safety has not declined, and all five ANSPs have taken steps to control costs. In addition, the ANSPs have improved the efficiency of their operations through the implementation of new technologies and equipment. According to the ANSPs, some of these outcomes would not have been feasible in a government organization. At a minimum, safety has not eroded since commercialization, according to the available data from of each of the five ANSPs. For example, data from Airways Corporation of New Zealand indicate a downward trend in incidents involving loss of separation for the years following commercialization. Similarly, according to NAV CANADA's annual report for 2004, the rate of loss-of-separation incidents decreased from 1999/2000 through 2003/2004. Officials at Transport Canada, the safety regulator, confirm an overall decline in aviation incidents since commercialization. Additionally, stakeholders have anecdotally reported that they believe the air navigation system is as safe as it was when the government provided air navigation services. According to some, the separation of operating and regulatory functions has strengthened safety regulation and diminished any potential conflict of interest between promoting the financial interests of aviation operators and protecting safety. As improved technology and system upgrades have allowed individual controllers to handle increasing levels of air traffic, concerns have arisen about the potential for controllers' fatigue to compromise safety. Data are not available to assess this potential, but some ANSPs have taken steps to limit and monitor controllers' workload. For example, the UK's CAA has regulated the hours of civil air traffic controllers, and its Safety Regulation Group must be notified of any breach by NATS or by controllers. In New Zealand, as air traffic has increased, some airspace sectors have been subdivided so that controllers are responsible for a smaller piece of airspace. To lower their personnel costs, all five ANSPs have reduced their administrative staff or flattened their management organizations. For example, NAV CANADA closed most of its regional administrative offices and centralized corporate functions to its headquarters, reducing mostly administrative staff by 1,100 people (17 percent of the workforce). Airways Corporation of New Zealand also reportedly reduced its personnel costs by eliminating some middle management and administrative positions. In general, the ANSPs have not reduced their air traffic controller staffs. To lower their facility operating costs, all five ANSPs have closed, relocated, or consolidated facilities. For example, Airways Corporation of New Zealand reported consolidating four radar centers into two over 8 years and is planning to consolidate these two into a single radar center by 2006. DFS has also integrated operations and consolidated facilities. Seventeen approach units have been integrated from the airports to the four air traffic control centers. It relocated the Dusseldorf control center to the Langen control center in 2002, a year earlier than planned, and transferred and consolidated its headquarters from Offenbach to Langen. DFS reports that, because its supervisory board now makes major investment decisions, rather than a parliamentary committee, it has been able to make key strategic decisions that would have been politically difficult when DFS was under government control. In the UK, NATS reduced its net operating costs by almost L96 million during 2002 through 2004, in part through direct management actions. For example, it consolidated two operations into one at the new air navigation services center called the Swanwick Center. According to NATS, it reduced its staff costs by L12 million and its costs for services and materials by about L11 million between 2002 and 2003, after placing this new center in service. Between 2003 and 2004, NATS reported reducing its operating costs for air traffic services by another L13 million through cost control measures. All five ANSPs have purchased new equipment and technologies that they say have improved productivity. For example, Airservices Australia reported increases in controllers' productivity following the introduction of the Australian Advanced Air Traffic System (TAAATS). This system replaced conventional radar screens with more advanced computer screens that display data from a range of sources, including ground based surveillance equipment and satellite-linked navigational equipment on aircraft, among others. TAAATS replaced handwritten paper flight progress strips with screen-based information that is updated automatically. DFS is also eliminating systems that depend on paper strips and anticipates productivity gains and cost savings as a result. In New Zealand, according to the union that represents air traffic controllers, individual controllers are now able to handle much more flight activity because of improved technology. Besides improving productivity, modernization, together with airspace redesign, has produced operational efficiencies, including fewer and shorter delays, according to the ANSPs. Commercialization has allowed the ANSPs to implement modernization projects more efficiently. Formerly, the uncertainty associated with the annual appropriations from national governments made it difficult to plan over multiple years. With access to cash flow and borrowed funds, the ANSPs report that they have been able to plan and execute projects more efficiently and have seen improvements in delivering projects on time, within budget, and to specification. For example, Airways Corporation of New Zealand deployed its new oceanic system, FANS1, in less than a year. The management of NAV CANADA estimates that it is producing new technology faster than the government once did and at half the cost. Some of the commercialized ANSPs maintain that they have achieved the benefits of modernization faster and at less cost by purchasing commercially available systems and upgrades or by modifying off-the-shelf technologies to meet their needs, rather than developing their own systems from the ground up. NATS purchased its oceanic system and automated tower/terminal control system from NAV CANADA. To achieve further purchasing efficiencies, some commercialized European ANSPs have developed an alliance to procure systems. For instance, Germany has developed a strategic alliance with Switzerland and the Netherlands for the joint procurement of a new radar system. Through their cost control initiatives and modernization efforts, some of the ANSPs have been able to lower their unit costs and, in turn, lower their charges to major commercial airlines, which pay the largest proportion of user fees and therefore are the primary users served by the ANSPs. Airservices Australia, for example, reported lower unit costs resulting from the increases in controllers' productivity that followed the introduction of TAAATS. NAV CANADA estimates that it is saving the airlines approximately C$100 million annually in reduced aircraft operating costs. According to NAV CANADA, the airlines are now paying 20 percent less in user fees than it formerly paid in ticket taxes when the government provided air navigation services. In Germany, Lufthansa stated that except in business years 2001 through 2003, it has paid less in user fees than it paid during the initial commercialization of Germany's air navigation service. According to Airways Corporation of New Zealand, it reduced en route charges by 22 percent in 1995 and another 13 percent since 1997, resulting in an overall reduction of more than 30 percent. However, for general aviation operators, commercialization has sometimes meant an increase in fees. Before commercialization, many only paid taxes on fuel. Some countries, such as Canada and New Zealand, have tried to make the fees affordable for small operators by charging a flat fee. NAV CANADA, for instance, charges general aviation operators a flat annual fee of C$72. According to the Aircraft Owners and Pilots Association--New Zealand, Airways Corporation of New Zealand charges general aviation operators a fee of NZ$100 for 50 landings. In addition, Airways eliminated the en-route charge for light aircraft. Some governments have subsidized air navigation services at small, remote, general aviation, and regional airports, viewing such services as a public good. Australia, for instance, provides a subsidy for service to some remote areas under the Remote Air Subsidy Scheme. Similarly, to protect service to remote locations and ensure equity of service to smaller communities, Canada legislatively requires NAV CANADA to maintain service to such locations. For instance, service to the Northern region, which is designated as "remote," is guaranteed under the legislation. In addition, NAV CANADA is required to price services to remote locations on the same basis as service to the rest of the country. Through our research, we made a number of initial observations about the commercialization of air navigation services in the five countries we selected. The following paragraphs summarize these observations. Following commercialization, two changes--shifting the source of funding from appropriations to user fees and allowing the ANSPs to borrow money on the open market--have generally enabled commercialized ANSPs to cover their operating and capital costs. However, user fees and borrowing may not be sufficient to cover an ANSP's costs during an industry downturn. As a result, a contingency fund or other mechanism may help to offset the effects of a downturn, although it may not do so completely if the effects are severe. When the economy began to stagnate in 2000 and air traffic began to decline, revenues from ANSP user fees began to fall. These revenue losses grew as transatlantic traffic declined after September 11, particularly affecting some ANSPs. In the UK, as a result of both these losses and the relatively high debt that it had assumed to commercialize, NATS's solvency was threatened. Ultimately, NATS refinanced its debt with the concurrence of the Department for Transport and other shareholders. In Germany, DFS also experienced revenue losses, but to a lesser degree. DFS reported a loss of more than EUR33 million in 2001, when air traffic declined by 0.9 percent over the previous year. In 2002, it sustained a loss of more than EUR21 million, when air traffic levels fell 2.9 percent below 2001 levels. To address these deficits, DFS modified investments, canceled projects, and ultimately raised fees, thereby increasing financial pressures on the airlines. However, when air traffic increased again in 2003, DFS recorded an operating profit of more than EUR80 million and reduced fees for 2005 en route by 19.5 percent and terminal charges by 28 percent. DFS has begun to consider the benefits of a reserve fund, but German legislation governing air navigation service charges must be changed before DFS will be allowed to develop such a reserve. NAV CANADA had banked up to C$75 million in its rate stabilization fund before September 11 and the concerns about SARS. However, following the severe industry downturn resulting from these two events, the fund was quickly exhausted. Because the ANSP is typically the sole provider of en route and approach control services in a country, some mechanism may be necessary to keep prices in check. Since user fees constitute the ANSP's primary source of revenue, economic monitoring and regulation by an independent third party can protect users and ensure a fair pricing process. Such an entity can ensure that all parties' interests are taken into account and a variety of alternatives are considered. It can also provide assurance to users that price levels are appropriate, do not reflect overcharging, and are consistent with competitive practices. ICAO recognizes the need for an independent mechanism to provide economic regulation of air navigation services. According to ICAO, the objectives of economic regulation should include the following: Ensure nondiscrimination in the application of charges. Ensure that there is no overcharging or other anticompetitive practice. Ensure the transparency and availability of all financial data used to determine the basis for charges. Assess and encourage efficiency and efficacy in the operation of providers. Establish standards for reviewing the quality and level of services. Monitor and encourage investments to meet future demand. Ensure user views are adequately taken into account. Australia and Canada have taken different approaches to reviewing their ANSPs' user charges and price setting. In Australia, the Australian Competition and Consumer Commission (ACCC) oversees price changes. Airservices Australia must notify ACCC whenever it wants to raise fees. Following a formal notification and vetting process, ACCC decides to accept or reject the price change on the basis of its evaluation of Airservices' pricing proposal; and if they reject the proposed price, they can set a lower price. Recently, the ACCC rejected a proposal by Airservices for a temporary fee increase to address the revenue losses that followed September 11 and the SARS outbreak, as well as the collapse of Australia's second largest airline. In rejecting the proposal, ACCC considered the fact that the industry took exception to these increases, raising concerns about the need for longer-term price certainty. ACCC ruled in favor of the industry and rejected the temporary price increases, instead deciding that a longer-term arrangement be considered. ACCC directed Airservices to focus on 5-year pricing plans to encourage long- term planning, emphasizing that the robustness of the airlines should be taken into account when a price is set. Canada has no formal regulation of fee setting. According to the Office of the Auditor General, the Canadian Transportation Agency (CTA), the formal appeal agency, can intervene only in matters concerning the price- setting process, not price levels or price changes. CTA was not given authority over price-setting issues to ensure that NAV CANADA could maintain a good credit rating, thus making NAV CANADA appealing to financiers. (As of April 2005, NAV CANADA's bonds were rated AA-nearly as high as the government's AAA-rated bonds.) NAV CANADA's board of directors, which includes air carrier representatives, is the main venue for the industry to express any grievances over pricing issues. However, according to Air Canada, its input on the board is limited and, because the public has comparable representation on the board, the public and the industry cancel out each other's input. When NAV CANADA raised prices after its rate stabilization fund was exhausted during the economic downturn, air carriers argued that this move further disrupted their business cycle during a time of financial strain. CAA officials said they must ensure that society's broader interests are protected. In particular, GAO believes addressing the concerns of air traffic controllers was essential because they play a vital role in the air navigation system. For several of the ANSPs we reviewed, controllers' support of commercialization was crucial to move the process forward. In New Zealand, controllers supported commercialization when faced with an aging system and inadequate public funds to acquire new equipment. Controllers in Canada supported the transition following a 5-year salary freeze and hiring freezes. However, Canadian controllers' support for commercialization has diminished, mainly because of differences over collective bargaining issues such as wage increases, the right to strike and controller fatigue. The Canadian controllers have acknowledged that they were instrumental in pushing for change, but they have also noted that the results of commercialization have fallen short of their expectations. ANSPs have also noted the importance of involving stakeholders in efforts to design, acquire, and deploy new technologies. According to Airservices Australia, its air traffic controllers have come to understand the commercial imperative to make a return on investment. Similarly, Airways Corporation of New Zealand notes that it is essential to involve the same controllers throughout the design process so that there is consistency in requirements and a thorough understanding of the project's ongoing specifications. In Airways' experience, it is essential for controllers, manufacturers, and the ANSP to reach agreement in order to establish realistic expectations for system design from the very beginning. Hypothetically, small or remote communities, that rely primarily on aviation for transportation, may be threatened by location-specific pricing. Under this pricing scheme, an ANSP charges a fee for service that matches the cost of providing that service to a specific location. As a result, some communities may be subject to higher charges than others. By contrast, two ANSPs have used network pricing, a scheme that charges the same fee for air navigation services to every airport, regardless of size or location, even though the costs of providing the services to some airports may be greater than to others. Under network pricing, the service to heavily used airports subsidizes the service to others. Two of the ANSPs have adopted location-specific pricing for some air navigation services. (Airport services are provided by competition in the U.K., which may result in different prices.) Often, the minimum costs of service to small or remote communities are higher per plane than the costs of service to large communities because the cost of air navigation services must be spread among fewer operators, usually with smaller aircraft. If airlines decide that service to such communities is not commercially viable, they may ultimately discontinue service to these communities. Similarly, general aviation operators may be threatened if they are required to pay fees that cover the full costs of the air navigation services they receive. Continuing to serve small communities and operators may require special efforts to balance public service needs and business interests. In addition to the Remote Air Subsidy Scheme mentioned earlier, Australia also provided a subsidy that allowed prices to be capped at most general aviation and regional airports. This subsidy was designed to ease the transition to location specific pricing for select airports and is scheduled to end in June 2005. Consequently, Airservices Australia reported that, in order to compensate, it will be increasing charges over the next 5 years at these locations and that these increases have been approved by the regulator. These increases have been moderated to balance the effect on aviation at airports frequently used by general aviation operators. As a result, concerns persist about the implications of further price increases and any future need to close or reduce services at these locations. Some fear that needed air services to remote bush locations will be lost while others fear that secondary services such as flight school training will be affected. Hypothetically, the impact on small operators and remote communities is difficult to assess. Theoretically, costs may go up as a result of implementing user fees, but charges may not necessarily be prohibitive. Where service to small communities is legislatively mandated, ANSPs may ultimately be forced to take a financial loss if they are not able to fully recover their costs. Airservices Australia is seeking to control costs at some of those locations by deploying new lower-cost technologies to serve small communities. For example, Airservices Australia is planning to install Automatic Dependent Surveillance Broadcast (ADS-B) ground stations, which will allow air traffic surveillance services over remote regions of Australia where radar is not a cost-effective solution. To protect taxpayers' interests, the countries that commercialized their air navigation services needed to have an appropriate valuation of their facilities and equipment before selling these assets to the newly established ANSP. According to the Office of the Auditor General (OAG) in Canada, Canada did not properly value its ANSP assets and infrastructures. The C$1.5 billion value that the government negotiated with NAV CANADA in 1996 fell short of the C$2.3 billion to 2.4 billion estimate developed in 1995 by a third party hired by the OAG. NAV CANADA reported, however, that both it and Transport Canada disagreed with the OAG's estimate and its underlying assumptions. In a study of the NATS reorganization, the National Audit Office (NAO) found that the UK government had raised some L758 million from the sale of the ANSP to a consortium of seven UK-based airlines. However, these proceeds were realized by increasing the level of NATS's bank debt. As a result of this debt, NATS was extremely vulnerable to the decline in air traffic after September 11. DFS is currently undergoing a valuation of its assets in preparation for selling 74.9 percent of its equity to private investors in a formal competitive bidding process. Some countries experienced difficulties in retaining a sufficient number of staff to carry out safety regulation. For example, in Canada, many of the safety staff moved to the newly established NAV CANADA after commercialization, leaving the government regulator, Transport Canada, with insufficient staff to carry out timely safety inspections during the first 6 months after commercialization. Germany faces a similar challenge as the government prepares to develop a safety regulatory authority in accordance with the Single European Sky initiative by the end of this year. According to the Transport Ministry, it may be difficult for the government to recruit safety staff on a civil service salary and compete with the salaries of safety inspectors from the private sector. Obtaining baseline measures before commercializing a country's air navigation services will allow the government and others to assess the new ANSP's safety, cost, and efficiency. Some of the countries whose ANSPs we reviewed did not collect baseline data or measure performance as extensively as the commercialized ANSPs have since done. As businesses, commercialized ANSPs must assess the progress they are making toward their goals to access private funding, and therefore they need extensive performance data. In addition, international organizations, such as CANSO and ICAO, support commercialized ANSPs and ICAO, for example, emphasizes the importance of having transparent financial data available for economic oversight. 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 about this testimony, please contact me at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony included Bess Eisenstadt, Samantha Goodman, Hiroshi Ishikawa, Jennifer Kim, Steve Martin, and Richard Scott. 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In the past, governments worldwide owned, operated, and regulated air navigation services, viewing air traffic control as a governmental function. But as nations faced increasing financial strains, many governments decided to shift the responsibility to an independent air navigation service provider (ANSP) that operates along commercial lines. As of March 2005, 38 nations worldwide had commercialized their air navigation services, fundamentally shifting the operational and financial responsibility for providing these services from the national government to an independent commercial authority. GAO selected five ANSPs--in Australia, Canada, Germany, New Zealand, and the United Kingdom--to examine characteristics and experiences of commercialized air navigation services. These ANSPs used different ownership structures and varied in terms of their size, amount of air traffic handled, and complexity of their airspace. This testimony, which is based on ongoing work, addresses the following questions: (1) What are common characteristics of commercialized ANSPs? (2) What do available data show about how the safety, cost, and efficiency of air navigation services have changed since commercialization? (3) What are some initial observations that can be made about the commercialization of air navigation services? The five commercialized ANSPs that GAO selected for review have a number of common characteristics: Each operates as a business, making and carrying out its own strategic, operational, and financial decisions. Each generates and manages its own revenue to cover its costs, charging fees to users and borrowing funds from private markets instead of relying on annual governmental appropriations. Each has also put commercial financial and performance data systems in place. All five ANSPs have retained safety as their primary goal, and each is subject to some external safety regulation. Each ANSP is largely a monopoly provider of air navigation services and undergoes some form of economic review or follows some guidelines for setting prices. The ANSPs report that, since commercialization, each has maintained safety, controlled costs, and improved efficiency. Data from all five indicate that safety has not eroded. For example, data from New Zealand and Canada show fewer incidents involving loss of separation (the required distance between an aircraft and another object). All five ANSPs have taken steps, such as consolidating facilities, to control their operating costs. Finally, all five ANSPs have invested in new technologies that the ANSPs say have lowered their costs by increasing controllers' productivity and produced operating efficiencies, such as fewer or shorter delays. Such measures have generally resulted in lower fees for major carriers, but some smaller, formerly subsidized users now pay new or higher fees and are concerned about future costs and service. GAO's work to date suggests a number of observations about commercialized ANSPs: A contingency fund can help an ANSP cover its costs without greatly increasing user fees during an economic decline; economic regulation by an independent third party can ensure that an ANSP sets prices fairly; providing a forum for stakeholders gives attention to their needs; and special measures may be necessary to reconcile the inability of some users to pay the full costs of services at some small communities and the ANSP's need to recover its costs.

This section provides information on the Corps' organizational structure, its project operations and water control manuals, and the process for formulating its operations and maintenance budget. Located within the Department of Defense, the Corps has both military and civilian responsibilities. The Corps' civil works program is organized into three tiers: a national headquarters in Washington, D.C.; eight regional divisions that were established generally according to watershed boundaries; and 38 districts nationwide (see fig. 1). Corps headquarters primarily develops policies and provides oversight. The Assistant Secretary of the Army for Civil Works, appointed by the President, establishes the policy direction for the civil works program. The Chief of Engineers, a military officer, oversees the Corps' civil works operations and reports on civil works matters to the Assistant Secretary of the Army for Civil Works. The eight divisions, commanded by military officers, coordinate civil works projects in the districts within their respective divisions. Corps districts, also commanded by military officers, are responsible for planning, engineering, constructing, and managing water-resources infrastructure projects in their districts. Districts are also responsible for coordinating with projects' nonfederal sponsors, which may be state, tribal, county, or local governments or agencies. In 1969, the Corps formed the Institute for Water Resources--which is a field-operating activity outside of the headquarters, division, and district structure--to provide forward-looking analysis and research in developing planning methodologies to aid the civil works program. Specifically, the institute fulfills its mission, in part, by providing an analysis of emerging water resources trends and issues and state-of-the-art planning and hydrologic-engineering methods, models, and training. In 2009, the Corps established the Responses to Climate Change program under the lead of Institute for Water Resources to develop and implement practical, nationally consistent, and cost-effective approaches and policies to reduce potential vulnerabilities to the nation's water infrastructure resulting from climate change and variability. The Corps is responsible for operations at 707 dams that it owns at 557 projects across the country, as well as flood control operations at 134 dams constructed or operated by other federal, nonfederal, or private agencies. Each of these projects may have a single authorized purpose or serve multiple purposes such as those identified in the original project authorization, revisions within the discretionary authority of the Chief of Engineers, or project modifications permitted under laws enacted subsequent to the original authorization. For example, the Blackwater Dam in New Hampshire has the single purpose of flood control, whereas the Libby Dam in Montana has multiple purposes, including hydropower, flood control, and recreation. These 841 dams and their reservoirs are operated according to water control manuals and their associated water control plans, which Corps regulations require to be developed. A water control manual may outline operations for a single project or a system of projects. For example, the Missouri River Mainstem Reservoir System Master Water Control Manual outlines the operations at six dams and their associated reservoirs, and the Folsom Dam Water Control Manual applies to one dam and its reservoir. Water control manuals include a variety of information the Corps uses in operating the dams, including protocols for coordinating with and collecting data from federal agencies, such as NOAA's National Weather Service and USGS, as well as water control plans. The water control plans, sometimes referred to as chapter 7 of the water control manuals, outline how each reservoir is to be operated and include relevant criteria, guidelines, and rule curves defining the seasonal and monthly limits of storage and guide water storage and releases at a project. According to the Corps' engineer regulations, the Corps develops water control plans to ensure that project operations conform to objectives and specific provisions of authorizing legislation. Water control plans also generally describe how a reservoir will be managed, including how water is to be allocated between a flood control storage pool and a conservation storage pool, which is used to meet project purposes during normal and drought conditions. The bottom of a conservation storage pool is considered inactive and is designed for collecting sediment (see fig.2). Water levels in the pools are defined based on a statistical analysis of historical rain events. For those projects that have multiple authorized purposes, water control plans attempt to balance water storage for all purposes. Corps engineer regulations require that all water control manuals--except manuals for dry reservoirs that do not fill with water unless floodwaters must be contained--have an associated drought contingency plan to provide guidance for water management decisions and responses to a water shortage due to climatological drought. These plans, which can cover more than one project: (1) outline the process for identifying and monitoring drought at a project, (2) inform decisions taken to mitigate drought effects, and (3) define the coordination needed with stakeholders and local interests to help manage water resources so they are used in a manner consistent with the needs that develop, among other things. According to a 2014 Corps engineer regulation, water control manuals may be revised for reasons such as land use development in the project area and downstream from it, improvements in technology used to operate projects, reallocation of the water supply, new regional priorities, or changes in environmental conditions. The Corps' engineer regulation also directs districts to include in water control manuals a provision allowing temporary deviations from a project's approved water control plan to alleviate critical situations, such as a flood or drought, or to realize additional efficiencies without significantly affecting the project's authorized purposes. Districts are to perform a risk and uncertainty analysis to determine the potential consequences of such a deviation. Division commanders are responsible for reviewing and approving any proposed deviations. According to the engineer regulation, deviations are meant to be temporary and, if a deviation lasts longer than 3 years, the water control manual must be revised. Our prior work has found that the Corps' headquarters, divisions, and districts are all involved in developing the President's budget request for the Corps. The development process spans 2 years; for example, development of the fiscal year 2018 budget began in fiscal year 2016. After receiving budget guidance from the Office of Management and Budget as well as the Assistant Secretary of the Army for Civil Works, district staff compile a list of operations and maintenance (O&M) projects necessary in their districts and submit their needs to the relevant division. O&M projects may include, among other things, water control manual revisions, dredging, replacement of dam parts, dam safety measures, or adding capacity at hydropower projects. Division staff then rank the O&M projects from all districts in the division and submit those rankings to Corps headquarters staff for review. Headquarters staff review the rankings to help ensure they are consistent with Corps-wide guidance and result in decisions that emphasize agency-wide priorities. Headquarters staff consolidate the O&M requests across business lines and divisions into a highest-priority grouping. Once the Corps completes its internal review of the budget request, the Assistant Secretary of the Army for Civil Works approves and submits its budget to the Office of Management and Budget for review. The Office of Management and Budget recommends to the President whether to support or change the Corps' budget request, and the President's budget request is transmitted to Congress. According to agency officials, the Corps conducts ongoing, informal reviews of selected water control manuals and has revised some of them, but the extent of the reviews and revisions is unclear because they were not documented or tracked. More specifically, district officials said that the Corps reviews the manuals as part of daily operations but does not document the reviews, and there is no guidance on what constitutes a review or how to document it. Further, the Corps does not track consistent information across divisions on the status of manuals to indicate revisions that were made or are needed. It is unclear to what extent the Corps has reviewed its water control manuals because district officials did not document these reviews, which, according to district officials, are informal and conducted on an ongoing basis through daily operations. A 2014 Corps engineer regulation states that water control manuals should be reviewed no less than every 10 years, so that they can be revised as necessary. Most district officials we interviewed said that they informally review the water control plan because this portion of the manual describes how projects are to be operated under different conditions to meet their authorized purposes. However, officials we interviewed from all 15 districts said they do not document these informal reviews because they consider such reviews to be part of the daily routine of operating projects. Because these informal reviews are not documented, knowledge of these reviews and their results may be limited to personnel directly involved with them. Officials we interviewed from four districts said that the loss of institutional knowledge posed a challenge to conducting efficient reviews of manuals. For example, officials from one district said that no Corps officials currently employed at the district had worked on developing the manual for a project and had no supporting documentation of the process, so the officials did not know why prior Corps officials wrote the manual in a particular way. As a result, the officials said it took them longer to review the manual. One Corps district we reviewed had previously documented informal reviews of water control manuals. Specifically, officials we interviewed in this district said that they documented reviews of some water control manuals in 2005 as part of a district-wide effort to ensure these manuals were adequate to meet the projects' authorized purposes since they had not been revised in a long time. According to these officials, as part of this effort, if they determined that all of the operating conditions in a manual were still current, they submitted a memorandum to their division that revalidated the manual's water control plan. Officials from that district said they have not documented reviews of water control manuals since 2005 because they chose to focus only on those manuals they knew needed revision. However, the Corps does not have guidance on what activities constitute a review or how officials should document the results of their reviews. Under federal standards for internal control, internal control and other significant events are to be clearly documented in a manner that allows the documentation to be readily available for examination, such as in management directives, administrative policies, or operating manuals. Without developing guidance on what activities constitute a review of a water control manual and how to document that review, the Corps does not have reasonable assurance that its districts will consistently conduct reviews and document them to provide a means to retain organizational knowledge and mitigate the risk of having that knowledge limited to personnel directly involved with these reviews. The Corps has revised some water control manuals; however, divisions and districts do not track consistent information about revisions to manuals, and the extent to which they have been revised--or need revision--is unclear. Corps engineer regulations state that manuals are to be revised as needed, in accordance with the regulations. Districts have revised some water control manuals for a variety of reasons, such as in response to infrastructure modifications and weather events, according to the Corps' documents and its headquarters, division, and district officials we interviewed. For example, officials we interviewed in one district said they revised a water control manual after a flood highlighted a need to change the seasonal and monthly limits of reservoir storage when water recedes. Officials we interviewed from other districts said they revised a manual based on vulnerabilities identified through the periodic inspections they conduct of projects through the Corps' dam safety program. District officials we interviewed said that the time and resources needed to revise manuals vary greatly, depending on the nature of the revisions and the complexity of the project, among other things. For instance, according to a Corps 2012 engineer regulation, all revisions to a water control manual are to undergo a quality control review of the science and engineering work by district leadership. Depending on the revisions made, manuals may also undergo a technical review by division leadership and an independent external peer review by a panel of experts. For example, according to a Corps engineer regulation and division and district officials we interviewed, if the districts make substantial revisions to a manual's water control plan, they are to complete environmental analyses required by the National Environmental Policy Act of 1969, which they said involves considerable time and coordination with other federal agencies and opportunity for public comment. District officials told us that making such substantive revisions to a manual takes more time and resources than making an administrative revision because of the additional requirements for review. Moreover, some district officials noted that the longer they defer making revisions to a manual, the more extensive and complex the changes may become, changes that may add time and increase costs to revise the manual. Officials in one district said that it cost about $100,000 to revise one section of a manual's water control plan, which did not significantly affect other aspects of the plan. In contrast, officials in another district said that it cost over $10 million and took over 25 years to revise a manual that included a water control plan for several projects, primarily because of litigation over the revisions. Our review of division documents indicates that all eight divisions we reviewed tracked the date a manual was last revised, but officials told us that the length of time since the last revision is not necessarily indicative of whether manuals need to be revised. According to headquarters and district officials we interviewed, water control manuals are designed to provide flexibility for a broad variety of runoff and climatic conditions. For example, headquarters officials said the rule curve in one water control manual provided guidelines for how much water operators should take out of the reservoir during October and November to meet its flood risk management target, while at the same time holding enough water to, among other things, meet its authorized purposes of hydropower and providing water flow for an endangered fish species. However, two knowledgeable stakeholders we interviewed said that many of the Corps' rule curves assume that the chances of an extreme event are equally likely for any given year, which may not reflect actual conditions. These stakeholders said that the Corps should consider revising water control manuals with dynamic rule curves to account for potential changes to climate conditions, but a Corps official said that the science behind dynamic rule curves is still being developed. In addition, Corps officials said that the provisions in water control manuals that allow temporary deviations from water control plans, if necessary, provide districts with flexibility in operating projects. For example, in response to drought conditions, the Corps approved a deviation from the water control plan in December 2014 at a project in California, a deviation that allowed the Corps to temporarily retain water captured behind the dam following a rainstorm. According to officials in that district, this temporary deviation allowed them to respond to the immediate stakeholder interests in conserving water during the drought, so they did not need to revise the water control manual. Given the flexibilities provided by rule curves and temporary deviations, not all manuals need to be revised, according to Corps officials we interviewed at headquarters, divisions, and districts. However, the extent to which water control manuals have been substantively revised, if at all, remains unknown because the divisions and districts we reviewed did not track consistent information about revisions to water control manuals to help ensure that manuals are revised in accordance with engineer regulations. For example, based on our review of Corps documents, one of eight divisions tracked whether the water control plans in its water control manuals reflected actual operations of the project, but the remaining seven divisions did not. In addition, another division tracked information about when the water control manuals in five out of six of its districts had been revised. Officials whom we interviewed from this division said they were not sure if any of the manuals in the sixth district had been reviewed because information had not been submitted by the district. Corps headquarters officials said that the Corps does not track the status of water control manual revisions agency-wide because two people in headquarters oversee all of the Corps' water resources operational issues, among other duties, and, therefore, divisions and districts were given responsibility for tracking revisions. However, these officials said the agency is compiling information to create a central repository of water control manuals, among other things, to respond to activities set forth in an action plan for the President's Memorandum on drought resilience. They said the repository could be used to track the status of revisions or needed revisions of manuals, but they do not currently plan to do so. Furthermore, district officials we interviewed told us they have identified certain manuals needing revision, but they have not received the O&M funds they requested to revise these manuals and documentation shows that they do not track consistent information on these manuals. A Corps engineer manual states that there may be reasons--such as new hydrologic data or a reevaluation of water control requirements--to revise water control manuals to reflect current operating conditions. Divisions are responsible for prioritizing the O&M funding requests they receive from all of their districts. Corps budget documents describe factors to consider for agency-wide prioritization--such as whether an item is required to meet legal mandates or would help ensure project safety (e.g., by paving a project access road)--but headquarters officials said each division may add other factors for consideration. According to our document review, one of the eight divisions tracked the priority that districts assigned to revising water control manuals when requesting O&M funds during the budgeting process, and four divisions tracked the fiscal year they proposed revising certain manuals, pending available funding. However, most district officials we interviewed said revisions to water control manuals are often a lower priority than other O&M activities, such as equipment repairs, sediment removal, or levee repairs. As a result, districts may not get funding to revise water control manuals. Moreover, Corps headquarters officials said that each division and district varies in the resources and staff it has available to conduct water control manual reviews and make revisions. For example, officials we interviewed from two districts in the same division said they do not have staff available to review water control manuals, and they have not received the funding they requested to revise their water control manuals. Corps headquarters officials said they do not track which manuals the districts have requested funds to revise--and therefore cannot prioritize these requests--because they have limited staff to accomplish water resources management activities. However, internal control standards in the federal government call for agencies to clearly and promptly document transactions and other significant events from authorization to completion. Without tracking which manuals need revision, it is difficult for the Corps to know the universe of projects that may not be operating in a way that reflects current conditions as called for in the Corps' engineer manual and prioritize revisions as needed. District officials whom we interviewed said that not revising water control manuals regularly could lead projects to operate inefficiently under changing conditions. For example, farmers downstream from one project wanted the Corps to consider changing operations so that their fields would not flood when it rained. However, officials in that district said they requested but did not receive the funds to revise the manual and could not fully address the farmers' concerns. Officials in another district said they have requested funds to revise several manuals that they described as outdated, but because they have not received funds, they noted they were operating those projects in a way that differed from some aspects of the approved water control plans and they did not request deviations. Instead, they said they referred to handwritten notes and institutional knowledge to operate those projects. For example, officials said that due to sedimentation build up in the reservoir of one project, they are operating that project 22 feet higher than the approved plan. According to a Corps engineer regulation, the Corps develops water control plans to ensure that project operations conform to objectives and specific provisions of authorizing legislation. However, because some manuals that need revision have not been revised and, as some district officials noted, operations for certain projects differ from aspects of the approved water control plans in those manuals, the Corps lacks assurance that project operations are conforming to the objectives and specific provisions of authorizing legislation. The Corps has efforts under way to improve its ability to help respond to extreme weather events. These efforts include developing a strategy to revise its drought contingency plans and studying the use of forecasts to make decisions on project operations. The Corps is also conducting research on how to better prepare operations for extreme weather. To better respond to drought, the Corps is developing a strategy to analyze drought contingency plans in its manuals and devise methods for those plans to account for a changing climate. According to a 2015 Corps report on drought contingency planning, the Corps is developing the strategy because climate change has been and is anticipated to continue to affect the frequency and duration of drought in the United States. The Corps last systematically prepared drought contingency plans in the 1980s through the early 1990s, before climate change information was widely available. These plans assumed that historic patterns of temperature, precipitation, and drought provided a reasonably accurate model of future conditions. According to the Corps' 2015 report, the agency subsequently identified and reviewed all of its drought contingency plans. The Corps' review found (1) that none of the plans contained information on drought projections under future climate change and (2) that it was unlikely that the plans provided an adequate guide for preparing for future droughts. As of May 2016, the Corps was conducting pilot updates of drought contingency plans at five high-priority projects to help test methods and tools for those plans to account for a changing climate. According to the Corps' 2015 report, these pilot projects will help the agency develop a framework for a systematic update of drought contingency plans. Corps officials said these pilots are to be largely completed by the end of calendar year 2016. The Corps has created an internal website available to all Corps officials to disseminate the results of the drought contingency plan analysis, pilot project results, and other drought-related information. In addition to completing the pilot projects, Corps officials said the agency plans to compile a list of drought contingency plan priorities by the middle of fiscal year 2017 for inclusion in the fiscal year 2018 budget. In addition to its efforts related to drought contingency plans, the Corps is studying the use of forecasting tools to determine whether water control manuals can be adjusted to improve water-supply and flood-control operations at two projects in California--Folsom Dam and Lake Mendocino. The Corps has historically used forecasts to some degree in its operations, largely by using models that create a single forecast based on the existing hydrologic data. According to Corps officials, the Folsom Dam and Lake Mendocino projects are evaluating the potential to incorporate forecasts into their operational rules, by using statistical techniques to simulate multiple, slightly different initial conditions and identify a range of potential outcomes and their probability. The use of forecasts at these projects will depend on whether the skill of the forecasts is improved to the point where they are viable in informing reservoir operations. Corps officials told us that the forecasts must be accurate in terms of space and time to allow the reservoirs to retain some water for future supply as long as the retained water can be safely released, if necessary, prior to the next storm. At the first project, Folsom Dam, the Corps and the Department of the Interior's Bureau of Reclamation are constructing an auxiliary spillway project to improve the safety of the dam and reduce the flood risk for the Sacramento area. Officials also said the water control manual must be updated to reflect the physical changes to the project, but the Corps is also considering incorporating forecasting into its operating rules so that prior to storm events, water can be released earlier than without forecasting capabilities. Corps officials said the revisions to the Folsom Dam water control manual, outlining the forecast-based operations, are estimated to be completed in April 2017. For the second project, Lake Mendocino, an interagency steering committee was formed to explore methods for better balancing water supply needs and flood control by using modern forecasting observation and prediction technology. Corps officials told us the interagency committee expects to complete a preliminary viability study on the project by the end of calendar year 2017. Corps headquarters officials said that once they determine how forecasting can be incorporated into these projects, the agency may consider using forecast-based operations at other projects. Four of the five knowledgeable stakeholders we interviewed said that it would be important for the Corps to consider using such operations to help ensure efficiency and to be able to respond to changing patterns of precipitation. These views are consistent with our 2014 report on the Missouri River flood and drought of 2011 to 2013, in which we recommended that the Corps evaluate forecasting techniques that could improve its ability to anticipate weather developments for certain projects. However, Corps officials and knowledgeable stakeholders also said that the Corps faces two key challenges in implementing forecast-based operations at its reservoirs. First, four of the five knowledgeable stakeholders we interviewed said that the Corps' primary mission of flood control makes it difficult for the agency to accept the uncertainty that is involved with forecasting. Second, forecasting may be more complex in certain regions of the country, because according to one knowledgeable stakeholder and Corps officials, much of the rain in California is a result of atmospheric rivers, which produce rainfall that is more predictable than the convection rains that are experienced in the Midwest. The Corps' Responses to Climate Change program is conducting research on adaptation measures through vulnerability assessments for inland projects and sedimentation surveys. In 2012, the Corps initiated an initial vulnerability assessment that focused on how hydrologic changes due to climate change may impact freshwater runoff in some watersheds. This assessment identified the top 20 percent of watersheds most vulnerable to climate change for each of the Corps' business lines. According to Corps officials, this assessment was conducted for watersheds, because actionable science was not currently available to conduct such an assessment at the project level. However, the Corps is working with an expert consortium of federal and academic organizations--including NOAA, the Bureau of Reclamation, USGS, the University of Washington, and the University of Alaska--to develop future projected climatology and hydrology at finer scales. This project is intended to provide the Corps and its partners and stakeholders with a consistent, 50-state strategy to further assess vulnerabilities, a strategy that will also support planning and evaluation of different adaptation measures to increase resilience to specific climate threats. According to the Corps, this consortium holds monthly meetings to review progress made by the various members. According to Corps officials, the consortium plans to release reports in 2016 and 2017 that will enable the Corps to improve tools, methods, and guidance for finer-resolution analyses using climate-impacted hydrology. The Corps has also begun to evaluate reservoir vulnerabilities to altered sedimentation rates resulting from extreme weather and land use changes. In 2012, the Corps began conducting 15 pilot studies at various districts to test different methods and serve as a framework for adapting to climate change. Two of these pilots predicted changes in the amount of sediment in a reservoir because of changes in hydrologic variables as a result of climate change. Additionally, according to the Corps' website, reservoirs in areas with drought conditions have experienced lower-than- normal levels of water in their conservation storage pools. These lower levels have revealed additional and unexpected sedimentation in reservoirs that could reduce the space available to store water. In 2013, the Corps developed a program to deploy airborne laser scanning systems to measure and collect data on the reservoirs in drought-affected areas. In 2015, this system was tested in California to refine the process to collect sedimentation data and modify the system for specific aircraft. According to a Corps official we interviewed in the Responses to Climate Change program, the agency plans to further refine the data collected and evaluate how these data change over time. This effort, the official told us, is also expected to provide indicators to support the analysis of future sedimentation rates based on climate changes for use in the Corps' climate vulnerability analysis. The official said a baseline report on the Corps' reservoir sedimentation status is expected by the end of fiscal year 2016. This effort was highlighted in the action plan for the President's Memorandum on Building National Capabilities for Long-Term Drought Resilience, which lays out a series of activities to fulfill the President's drought-resilience goals. The Corps has revised some of the water control manuals used to operate its water resources projects, which serve important public purposes such as flood control, irrigation, and water supply. But district officials told us there are manuals that do not reflect the changing conditions in the areas surrounding the projects. A Corps engineer regulation states that the water control manuals should be reviewed no less than every 10 years and revised as needed. However, there is no Corps guidance on what activities constitute a review, and while district officials said they informally reviewed selected water control manuals through daily operations, they also said they do not document these reviews. Without developing guidance on what activities constitute a review of a water control manual and how to document that review, the Corps does not have reasonable assurance that its districts will consistently conduct reviews and document them to provide a means to retain organizational knowledge and mitigate the risk of having that knowledge limited to personnel directly involved with these reviews. In addition, while the Corps has revised certain water control manuals in accordance with its engineer regulation, it does not track consistent information on revisions to its manuals. Furthermore, district officials said that they have requested funds to revise additional water control manuals as needed to reflect changing conditions, but they have not received those funds, and have not tracked consistent information about manuals needing revisions. However, internal control standards in the federal government call for agencies to clearly and promptly document transactions and other significant events from authorization to completion. Without tracking which manuals need revision, it is difficult for the Corps to know the universe of projects that may not be operating in a way that reflects current conditions as called for in the Corps' engineer manual and to prioritize revisions as needed. Because some manuals that need revision have not been revised and some district officials noted that operations for certain projects differ from aspects of the approved water control plans in those manuals, the Corps lacks assurance that project operations are conforming to the objectives of authorizing legislation. To help improve the efficiency of Corps operations at reservoir projects and to assist the Corps in meeting the requirement of the Water Resources Reform and Development Act of 2014 to update the Corps' 1992 reservoir report, 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 to take the following two actions: develop guidance on what activities constitute a review of a water control manual and how to document that review; and track consistent information on the status of water control manuals, including whether they need revisions, and prioritize revisions as needed. We provided a draft of this report for review and comment to the Department of Defense. In its written comments, reprinted in appendix I, the department concurred with our recommendations and noted that it will take steps to address these recommendations as it updates its guidance. In its comments, the department also stated that, as of May 2016, it had updated its Engineer Regulation 1110-2-240, Engineering and Design: Water Control Management. We incorporated this information into the report. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, 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 II. In addition to the individual named above, key contributors to this report included Vondalee R. Hunt (Assistant Director), Cindy Gilbert, Richard Johnson, Cynthia Norris, Dan Royer, Holly Sasso, Jeanette Soares, and Michelle R. Wong.

The Corps owns and operates water resource projects, including more than 700 dams and their associated reservoirs across the country, for such purposes as flood control, hydropower, and water supply. To manage and operate each project, the Corps' districts use water control manuals to guide project operations. These manuals include water control plans that describe the policies and procedures for deciding how much water to release from reservoirs. However, many of the Corps' projects were built more than 50 years ago, and stakeholders have raised concerns that these manuals have not been revised to account for changing conditions. The Water Resources Reform and Development Act of 2014 included a provision for GAO to study the Corps' reviews of project operations, including whether practices could better prepare the agency for extreme weather. This report (1) examines the extent to which the Corps has reviewed or revised selected water control manuals and (2) describes the Corps' efforts to improve its ability to respond to extreme weather. GAO reviewed the Corps' guidance on project operations; examined agency practices; and interviewed Corps officials from headquarters, all 8 divisions, and 15 districts--selected, in part, on regional differences in weather conditions. According to U.S. Army Corps of Engineers (Corps) officials, the agency conducts ongoing, informal reviews of selected water control manuals and has revised some of them, but the extent of the reviews and revisions is unclear because they are not documented or tracked, respectively. The Corps' engineer regulations state that water control manuals should be reviewed no less than every 10 years so that they can be revised as necessary. However, officials from all 15 districts GAO interviewed said they do not document informal reviews of water control manuals because they consider such reviews part of the daily routine of operating projects. The Corps does not have guidance, consistent with federal standards for internal control, on what activities constitute a review or how to document the results of reviews. Without such guidance, the Corps does not have reasonable assurance that it will consistently conduct reviews and document them to provide a means to retain organizational knowledge. The Corps' engineer regulations also state that water control manuals shall be revised as needed, but the extent to which manuals have been revised or need revision remains unknown because the Corps' divisions do not track consistent information about manuals. For example, based on GAO's review of the Corps' documents, one of the eight divisions tracked whether the water control plans in its water control manuals reflected actual operations of a project, but the remaining seven did not. While the Corps has revised certain water control manuals as called for by its regulations, district officials GAO interviewed said additional manuals need revision. However, the Corps does not track consistent information on manuals needing revision, in accordance with federal internal control standards. Without tracking which manuals need revision, it is difficult for the Corps to know the universe of projects that may not be operating in a way that reflects current conditions as called for in the Corps' engineer regulations. The Corps has efforts under way to improve its ability to respond to extreme weather, including developing a strategy to revise drought contingency plans and studying the use of forecasting to make decisions on project operations. To better respond to drought, the Corps is developing a strategy to analyze drought contingency plans in its water control manuals to account for a changing climate. As of May 2016, the Corps was conducting, as a pilot, updates of five projects' drought contingency plans to help test methods and tools for future use in other plans. The Corps is also studying the use of forecasting tools to improve water supply and flood control operations at two projects in California by evaluating if they can retain storm water for future supply as long as the retained water can safely be released, if necessary, prior to the next storm. Knowledgeable stakeholders GAO interviewed said it is important for the Corps to consider forecast-based operations at its projects to help ensure efficient operations and to be able to respond to changing patterns of precipitation. Corps officials said the agency may consider doing so once the two California projects are completed in 2017. GAO recommends that the Corps develop guidance on what constitutes a water control manual's review and how to document it and track which manuals need revision. The agency concurred with the recommendations.

In 1969, the federal government officially adopted a measure to ascertain how many people across the country had incomes that were inadequate to meet expenses for basic needs. This poverty measure was based on the finding of the U.S. Department of Agriculture's (USDA) 1955 Survey of Food Consumption that, on average, families of three or more persons spent one-third of their income on food. Poverty for a family of three was computed as three times the cost of the economy food plan, the least costly food plan designed by USDA. The poverty measure has been updated annually with a COL index to adjust for the change in prices nationwide, but the poverty measure has not been adjusted for differences in prices by geographic area. Thus, in 1993, a family of three with a cash income of less than $11,522 was considered to be living in poverty, regardless of place of residence. The concept of geographic COL adjustments of poverty measurement has been seen as problematic. A 1976 report to Congress on the measurement of poverty stated that "one of the most troublesome concepts of poverty measurement" was making adjustments for geographic differences in COL.It ultimately concluded that unresolved conceptual issues, such as the development of generally accepted market baskets of goods and services representative of the needs of the poor in various geographic areas, and data limitations precluded satisfactory geographic adjustments. More recently, in a 1992 report, we noted that there was insufficient data on which to base geographic adjustments to the measure of poverty. Some economists contend that adjusting the poverty measure for geographic differences in COL would be inappropriate, irrespective of the methodology used. They say that any such adjustment to reflect regional differences in market baskets would fail to recognize other regional differences that are relevant to a definition of poverty or the needs of the poor. For example, a COL index probably would not reflect differences among geographic areas in the level of support or assistance available to low-income families. To address our first two objectives, describing the function of a market basket and identifying potential methods for calculating a COL adjustment, we reviewed the relevant literature on measuring poverty and on geographic adjustment for COL and discussed these issues with specialists. These specialists included individuals associated with poverty measurement or COL data at the Bureau of Labor Statistics (BLS) and the Bureau of the Census, as well as private organizations and academic institutions. On the basis of these reviews and discussions, we identified 12 methodologies that might have potential for adjusting poverty measures to reflect geographic differences in COL. We consider these 12 methodologies to be illustrative for a wide range of potential approaches to determine geographic COL differences, but recognize that the list is not, and cannot be, exhaustive. (A more detailed account of our scope and methodology is contained in app. I.) To meet our third objective of obtaining expert opinion on the ability of the methodologies to adjust the poverty measure for geographic differences in COL, we identified experts and asked them to review the methodologies. From our list of more than 40 potential experts compiled during our literature review and initial discussions with specialists, we selected 15 experts to review the methodologies. (See app. II for a list of the selected experts.) We sent a questionnaire to these experts in which we described each methodology briefly. We asked the experts to review each of the 12 methodologies and to categorize the methodology's potential for use in adjusting the poverty measurement for geographic difference in COL. Additionally, we asked them to discuss the strengths and weaknesses of each methodology. (See app. III for a copy of the information and questionnaire sent to each expert.) All 15 experts responded and we tabulated their ratings for each methodology to determine the ones the experts considered most and least promising. We also analyzed the written responses on strengths and weaknesses. We did our work in Washington, D.C., between September 1994 and January 1995 in accordance with generally accepted government auditing standards. Because we did not evaluate the policies or operations of any federal agency to develop the information presented in this report, we did not seek comments from any agency. Market baskets of goods and services form the basis for determining a COL index. Of the methodologies we examined that calculate a COL index, none uses a uniform national market basket in which the same quantities of identical goods and services are used in all locations. In fact, these methodologies all used market baskets that have different measures for at least one component--for example, transportation or housing. Several of the experts, in their comments on COL methodologies, said that market baskets for COL indexes should vary to reflect differences in local standards of living. Market baskets of goods and services provide the foundation for determining COL. The composition of the market baskets, such as the items included or the quantity of one item included in relation to other items, affects the dollar values that are determined to represent COL. Conceptually, market baskets for a COL index would accurately reflect differences in tastes, as well as needs, such that an individual would derive equal satisfaction from the various market baskets priced in different geographic locations. For example, food preferences in southeastern states for low-cost cereals, such as rice and corn, lowers COL in these areas, while climatic differences necessitates the expenditures for heating a home and warm clothing and increases the COL in northern states. Obtaining a consensus on what should go into a COL index's market baskets and on how to update them would be difficult. The method generally preferred by the experts we contacted to determine the items to include in market baskets is to use expert judgment to specify the requirements for physical health and social well-being. But standards have not been identified for the majority of components of a COL index's market baskets. Even if consensus were obtained on the specific items and their quantities to include in a COL index's market baskets, another problem would be how to keep the market baskets up to date to reflect a constant standard of living. Of the methodologies we examined that calculate a COL index, all used market baskets that reflected regional differences in standards of needs and/or actual consumption patterns. Most notably, these methodologies varied in how they determined the housing and transportation components of the market baskets by adjusting for regional variation. We received numerous comments about market baskets for a COL index from the experts from whom we solicited assessments of the methodologies. Several experts noted the need to adjust the composition of the market baskets for differences in local standards of living among geographic areas. One expert commented that it is nearly impossible to obtain reliable evidence or credible expert judgments about the composition of market baskets to reflect specific local standards of living. This expert suggested that market baskets should be changed as acceptable standards are developed. The problem of keeping market baskets up to date was noted by other experts in their comments about the use of outdated data and concepts. For example, one expert specifically wanted a child care component to be included in the market baskets. We identified 12 generic methodologies that, in some part, could contribute to the development of a COL index that potentially could be used to adjust the poverty measurement for geographic differences. Four methodologies identified baseline data, or developed a market basket that could be the basis for constructing a COL index by geographic area. Six methodologies calculated a COL index from existing cost data or a previously defined market basket. Two methodologies developed an original market basket, collected data, and calculated a COL index with those data. Table 1 provides descriptions of the 12 methodologies. (Detailed descriptions of these methodologies are found in app. III.) A few of the methodologies are now used as COL indexes, but most have not been. For example, the norms, local indexes, and economic modeling methodologies are used in the private sector as COL indexes to make geographic COL adjustments for pay and relocation decisions. Until their discontinuance in 1981, estimates from the family budgets methodology had been used by policymakers to set income eligibility criteria for employment programs and to geographically adjust wages and salaries. Several of the methodologies that identify baseline data are used in ways other than to show differences in COL. For example, USDA uses the consumption data methodology to estimate expenditures on a child, which then are used to determine payments for the support of children in foster families. Many of the methodologies were developed by researchers to develop indexes to reflect COL differences, such as those categorized under the estimation models, interarea price index, and the consumer price index methodologies; but none of these are used to make geographic COL adjustments. (See app. III for detailed descriptions of how the data and indexes from the 12 methodologies are used.) We identified two additional methodologies but could not locate research that delineated how the methodologies could be implemented to develop a COL index. For example, administrative data from public assistance programs, such as the food stamp program, have been proposed as baseline data for developing a COL adjustment that would indicate the incidence of need within a geographic location. However, in our review of the relevant literature and discussions with specialists, we did not locate appropriate data that could be translated into an index to demonstrate geographic variation. Another approach to identify baseline data for a COL index would be to use information obtained from grocery stores' universal product code scanners. As in the case of administrative program data, we could not locate information that indicated how the product code data could be used to develop a geographic index or ratio. During the process of obtaining experts' ratings of promise for the 12 generic methodologies we identified, some experts indicated that we had not identified and presented all possible methodologies to make such a COL adjustment. A number of the experts suggested using a combination of several attributes from the methodologies that they reviewed. In addition, they identified four other methodologies that could be considered for doing geographic COL adjustments. One was a modification of the local indexes methodology, and another was a modeling technique to develop regional variables to obtain baseline data. The other two focused on ways to revise the current poverty measurement. One methodology included the most basic levels of shelter and food as the basis for measuring poverty. The other methodology, according to an expert, is what the National Academy of Sciences panel is expected to recommend in its forthcoming report. None of these methodologies was identified by more than one of the experts, however. We recognize that our list of 12 methodologies is not exhaustive, but consider it to provide a fair overview of the wide range of alternatives. The fact that the experts suggested further methodologies, and that no alternative was proposed by more than one expert, suggests that no agreement now exists among experts as to the best way to adjust the measurement of poverty for geographic differences in COL. This is discussed in the next section. The observation in a 1976 report to Congress that "although there may be geographic differences in the cost of living, there is no known way to make satisfactory geographic adjustments to the poverty cutoffs," still seems valid. The experts who we asked to assess the methodologies differed about how best to make adjustments because of numerous data and conceptual problems that they identified. Overall, the experts' ratings of each methodology's promise for geographically adjusting COL were mixed, and our content analysis of the experts' comments about each methodology's strengths and weaknesses yielded diverse and sometimes conflicting perspectives. Overall, the experts' ratings of methodologies were mixed. Although the majority of experts rated certain methodologies as showing little or no promise for adjusting the poverty measurement for geographic differences in COL, no clear consensus was observed overall in the ratings the experts gave regarding the methodologies' promise for making adjustments. A majority of the experts regarded local indexes, polling, family budgets, consumption data, and the consumer price index methodologies as showing little or no promise for making adjustments. The comparable pay methodology was found by more than two-thirds of the experts to be not promising at all. (See table 2 for experts' ratings of methodologies.) No methodology was rated by the majority of experts as showing great or very great promise to adjust the poverty measurement for geographic differences in COL. However, three methodologies--budgets, norms, and housing data--received a rating of at least moderate promise by a majority of the experts. The budgets methodology appeared to have the most promise, but less than half of the experts rated it as having great or very great promise. Our content analysis of the experts' comments on each methodology's strengths and weaknesses showed that the experts shared few common views on any specific methodology. When three or more experts did express a similar comment, it most often concerned a weakness rather than a strength of the methodology being rated. Some experts identified an attribute but expressed different perspectives as to whether it constituted a strength or weakness. Examples of mixed responses included one expert indicating that a strength of a particular methodology was its adaptability for use by government, while another expert characterized the same methodology as not being adaptable for use by government. In some instances, experts agreed about a methodology's attribute--e.g., its emphasis on children--but differed as to whether the presence of this attribute should be viewed as a strength or weakness. (See figure 1 for strengths and weaknesses of the methodologies.) Our content analysis of the experts' comments on the strengths and weaknesses of the three methodologies that received a rating of at least moderate promise by the majority of experts illustrates both the diverse and occasionally contradictory comments of the experts. The strengths of the budgets methodology lie in its representation of low-income families and its use of health and social well-being standards in the determination of the market basket. However, its eclectic approach of using these standards from various sources, which makes it difficult to explain to laypersons, was viewed as a weakness. Another weakness of the budgets methodology cited by the experts is that it fails to make adjustments for regional differences in transportation and some of the other market basket components. The experts who commented about its use of expenditure data were evenly split between those who viewed this as a strength and those who said it was a weakness. This methodology was viewed as capturing both contemporary and outdated concepts of consumption needs. For example, one expert cited the use of current standards as a strength, whereas other experts cited the use of 1981-based data to determine the importance given to items in the market basket as a weakness. The norms methodology was generally rated as promising because the COL index was frequently updated. The experts, however, differed in their comments about the methodology. For example, more than one-half of the experts said that the lowest income level for which the index was provided was well above poverty and was therefore unrepresentative of low-income families. Conversely, one expert, noting the degree of variation in income levels provided in the index, described it as "more relevant to the poor than other available sources." Mixed responses of both strengths and weaknesses were indicated for the (1) appropriateness of the items in the market basket, (2) degree of geographic variation shown in the index, (3) ability of the methodology to be adapted and implemented by the government, and (4) cost associated with such implementation. The housing data methodology was regarded as strong in its focus on what the experts considered the major source of variation in COL. The fact that housing was the only cost measured was also cited as this methodology's major weakness. As shown in table 3, the experts had mixed views about the representation in the baseline data of families living in poverty. The experts also lacked agreement on whether the housing concepts were appropriate. For example, one expert said the methodology had the "merit of focusing on rents for a specified type of apartment," while another said that "decent, safe, and sanitary" qualities of housing should be controlled in the measure to prevent downward bias in low-income areas. A content analysis of the experts' comments revealed that the local indexes methodology had many weaknesses resulting from its price data collection methods, which involve volunteers from chambers of commerce collecting and averaging prices that are representative of purchases of middle-management households in their local areas. This methodology was viewed to be an unsuitable representation of the consumption needs of the poor. Another weakness of the local indexes methodology was its exclusion of nonmetropolitan and rural areas. The polling methodology was regarded by several experts as a means to validate the measurement of poverty, rather than as an approach to make geographic COL adjustments. These experts said that this methodology provided insight into the relationship between an absolute measure of poverty, such as the current official measure, and a measure that is relative--that is, a measure that changes with growth in the economy or according to society's perception of an adequate level of income. According to the experts' comments, the main weakness of polling was in the quality of the data obtained through a public opinion survey. It was thought that the respondents would be biased in providing their estimates. For example, one expert wrote: "If respondents knew the survey results would be used to adjust poverty thresholds with implications for program expenditures and income taxes, then some may intentionally deflate or inflate their response, in their own self-interest." The experts had mixed views about the costs associated with this method; some experts said it would be cost effective, while others said it would be costly. According to the experts' comments, the main weakness of the comparable pay methodology was its reliance on employers' labor costs. Many experts said that such a measure included influences other than COL and that as a consequence it was inappropriate and an unsuitable substitute for COL, especially as a representation of the needs of the poor. For example, one expert said, "Geographic variations in quality of life affect the relationship between wages/salaries and living costs. Use of employer costs as a measure of living costs would introduce significant regional bias." Many weaknesses, as well as several mixed responses, were noted for the remaining three methodologies--consumption data, family budgets, and consumer price index. The concept of adjusting the measurement of poverty for geographic differences in COL has been seen as problematic, and remains so. We asked recognized experts to review 12 methodologies that illustrate the range of alternative approaches to adjust poverty measurement for geographic COL differences, and there was no consensus among these experts that any one methodology was the most promising for making such an adjustment. The fact that several of these experts suggested additional methodologies, but that no additional methodology was suggested by more than one of the experts, suggests to us that a consensus on any one approach does not exist. Where there does appear to be agreement, however, is that several of the methodologies offer little or no promise of appropriately adjusting the measurement of poverty for geographic COL differences. Further, obtaining a consensus on what items should go into a COL index's market baskets to reflect regional differences in consumption would be difficult. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 20 days after its issue date. At that time, we will send copies of the report to the Secretary of Commerce, the Secretary of Labor, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available to others on request. If you have any questions concerning this report, please call me on (202) 512-8676. Major contributors to the report are listed in appendix IV. To address the first two objectives of this job--describing the function of a market basket in determining a COL index, and identifying potential methods for calculating a COL adjustment--we first reviewed the relevant literature and held discussions with specialists in the field. These specialists included individuals associated with poverty measurement or COL data at the Bureau of Labor Statistics (BLS) and the Bureau of the Census, as well as private organizations and academic institutions. We also included individuals who did not support geographic adjustment of the poverty measurement, as well as those who have proposed methodologies to achieve this objective. On the basis of our literature review and preliminary discussions with specialists, we described the function of a market basket and identified an initial set of methodologies that might have potential for adjusting poverty measurement for geographic differences in the COL. We grouped similar methodologies into 12 categories and gave a generic name to each. We excluded potential methodologies if they did not identify existing data that could be turned into a geographically adjusted index. Two methods, one based on use of data from administrative records and one relying on data scanning of uniform product codes, were eliminated because they did not meet this criterion. To meet our third objective of obtaining expert opinion on the ability of these methodologies to adjust the poverty measure for geographic differences in COL, we selected a panel of 15 experts and surveyed them using a data collection instrument that contained brief descriptions of each of the 12 generic methodologies we identified. We asked the panel to review each description and rate each methodology in terms of its promise for use in adjusting the poverty measurement for geographic differences in COL. The description of each methodology identified data sources, discussed the cost and time needed to develop an index with the methodology, and provided an example of how the calculations would be made and the index could be used. We asked the developer or someone very familiar with each methodology to review our brief description to ensure that it accurately conveyed the essence of the methodology. We asked the selected experts to rate each methodology on a five-point scale that ranged from "not promising at all" to "shows very great promise," and then briefly discuss the strengths and weaknesses of the methodology. The experts were also asked to identify any additional methodology we may have overlooked and provide their views on the major challenges and costs associated with developing COL data that could be used to geographically adjust the poverty measure. We randomly chose 15 individuals to serve as experts from a candidate list of more than 40 names. To obtain a diverse candidate pool reflective of the different interests involved, we asked for nominations of potential experts from those specialists in the field and representatives of major statistical agencies that we met with during our initial discussions and literature review. To avoid potential conflicts of interest, we excluded individuals from the list who are currently serving on the National Academy of Sciences' Panel on Poverty and Family Assistance or who are political appointees. We recognize that the responses we received reflect only the views of the experts included. Several of the experts initially selected were unable to participate. We replaced these individuals with alternates from the remaining pool of candidates. (See app. II for a list of the participating experts.) Before contacting our initial selections, we asked congressional staff and officials from Census, BLS, and the Office of Management and Budget to review the list for balance and to identify any additional experts they believed should be included. No additions were suggested. The selected experts received a package containing a letter of introduction, an instruction sheet, descriptions of all the methodologies, and response sheets (see app. III). The package was sent on November 14, 1994. Responses were received from all 15 experts by January 6, 1995. We tabulated the ratings for each methodology to obtain an overall assessment of the experts' opinions of how promising each methodology was for use in adjusting the poverty threshold for geographic differences in COL. We also did a content analysis of the experts' responses to the strengths and weaknesses question for each methodology. From an initial reading of the responses, we developed a list of cited strengths and weaknesses. We used this list to code the responses of all experts for each methodology. The coding of the responses was verified by a second coder, and a third person checked coding reliability. As a method of focusing our analysis on the recurring comments made by the experts in their discussions of each methodology's strengths and weaknesses, we adopted a decision rule to report only those comments made by three or more experts for a particular methodology's attribute. Experts' comments on market baskets were identified separately and were used in our description of the function of the market basket. Additionally, we used experts' general comments on major challenges and costs associated with geographically adjusting poverty measures to illustrate our results. Mark C. Berger University of Kentucky Dixie Blackley Le Moyne College Tom Carlin Department of Agriculture Lawrence Gibson Eric Marder Associates, Inc. This appendix contains copies of the cover letter, instruction sheet, answer sheets, and brief descriptions of the 12 methodologies that we sent to the 15 experts we selected to review the methodologies. Federal Aid: Revising Poverty Statistics Affects Fairness of Allocation Formulas (GAO/HEHS-94-165, May 20, 1994). Poverty Trends, 1980-88: Changes in Family Composition and Income Sources Among the Poor (GAO/PEMD-92-34, Sept. 10, 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO provided information on the statistical data requirements for constructing a cost-of-living (COL) index that could be used, at the federal level, to adjust for geographic differences in living costs. GAO found that: (1) the current measurement to determine poverty levels does not account for geographic COL differences; (2) market baskets, a measure used to evaluate relative economic standing, would provide the foundation for any measure of living costs; (3) obtaining a consensus on what should go into a market basket for a COL index would be difficult; (4) there are 12 methodologies that could be used to contribute to an index to adjust the poverty measurement to reflect geographic differences; (5) the methodologies include budgeting for representative market baskets, measuring consumer spending norms, examining housing data, family budgets, or consumption data, developing various geographically specific price indexes, polling, calculating the relative amounts of time worked for each of the components of compensation, and estimating or modelling; and (6) experts' opinions about the methodologies' strengths and weaknesses were diverse and sometimes conflicting.

MDA's BMDS is being designed to counter ballistic missiles of all ranges--short, medium, intermediate, and intercontinental. Because ballistic missiles have different ranges, speeds, sizes, and performance characteristics, MDA is developing multiple systems that, when integrated, provide multiple opportunities to destroy ballistic missiles in flight for the strategic defense of the United States and regional defense of its deployed forces and allies. The BMDS architecture includes space- based sensors, ground- and sea-based radars, ground- and sea-based interceptor missiles, and a command and control, battle management, and communications system to provide the warfighter with the necessary communication links to the sensors and interceptor missiles. Table 1 provides a brief description of some of the BMDS systems, which MDA refers to as elements, and programs included in this year's assessment. More details can be found in our report. When MDA was established in 2002, the Secretary of Defense granted it exceptional flexibility to set requirements and manage the acquisition of the BMDS in order to quickly deliver protection against ballistic missiles. This decision enabled MDA to rapidly deliver assets, but we have reported that it has come at the expense of transparency and accountability. Examples of key problems we have cited in reports in recent years and which continue to affect MDA's acquisitions are highlighted below. MDA's highly concurrent acquisition approach has led to significant cost growth, schedule delays, and in some cases, performance shortfalls. Concurrency is broadly defined as the overlap between technology development and product development or between product development and production. While some concurrency is understandable, committing to product development before requirements are understood and technologies are mature or committing to production and fielding before development is complete is a high-risk strategy that often results in performance shortfalls, unexpected cost increases, schedule delays, and test problems. At the very least, a highly concurrent strategy forces decision makers to make key decisions without adequate information about the weapon's demonstrated operational effectiveness, reliability, and readiness for production. According to MDA officials, they have taken some steps to identify and track concurrency in their programs. However, high levels of concurrency adopted earlier for some programs persist today. Testing disruptions have reduced the knowledge planned to be available to inform acquisition decisions and understand performance. For example, flight test failures disrupted MDA's acquisitions of several components and forced MDA to suspend or slow production of three out of four interceptors, including the GMD interceptor and the Aegis BMD Standard Missile-3 Block IB (SM-3 Bock IB). In the Ground-based Midcourse Defense (GMD) case, because MDA moved forward years ago with CE-I and CE-II interceptor production before completing its flight testing program, test failures have exacerbated disruptions to the program. Specifically, because the program has delivered approximately three-fourths of the interceptors for fielding, it faces difficult and costly decisions on how it will implement corrections from prior test failures. Additionally, after fielding these assets, the program has had to add tests that were previously not planned, in order to assess the extent to which prior issues were resolved. It also had to delay tests that were needed to understand the system's capabilities and limitations. MDA has been challenged to meet some of its goals for the European Phased Adaptive Approach (EPAA). During the past several years, MDA has been responding to a mandate from the President to develop and deploy new missile defense systems in Europe. This four-phase effort was designed to rely on increasingly capable missiles, sensors, and command and control systems to defend Europe and the United States. Each successive phase is expected to defend larger areas against more numerous and more capable threat missiles. DOD delivered the first phase, for short and medium range defense of Europe, in December 2011, and has been making progress in developing some systems to support future phases. However, in March 2013, the Secretary of Defense canceled two programs, planned for the fourth phase, thus eliminating the fourth phase, which was intended to provide additional layer for defense of the United States against intercontinental ballistic missiles. The cancelations were driven in part by affordability concerns, schedule delays and technical risks associated with these programs. Our previous work found similar issues with other EPAA efforts. We also found that MDA has lacked a comprehensive management approach to synchronize key EPAA activities. Finally, MDA's acquisition baseline reporting has provided limited insight into the cost and schedule progress of the BMDS. Due to the acquisition flexibilities it has been granted, BMDS's entrance into DOD's acquisition process is deferred, and laws and policies that generally require major defense acquisition programs to take certain steps at certain phases in the acquisition process will not apply until the program enters this process. For example, major defense acquisition programs are generally required to document key performance, cost, and schedule goals in an acquisition baseline at certain phases in the acquisition process; because BMDS has not progressed through threshold phases of the DOD acquisition process, this requirement is not yet applicable. To improve the transparency and accountability of BMDS development efforts, Congress has enacted legislation requiring MDA to establish some baselines. MDA reported baselines for several BMDS programs to Congress for the first time in its June 2010 BMDS Accountability Report (BAR). Specifically, MDA's baselines, including resource and schedule baselines, are reported in the BAR and are updated annually. Since 2011, although progress has been made to improve the reporting, we have found issues affecting the usefulness of MDA's acquisition baselines for oversight due to (1) a lack of clarity, consistency, and completeness; (2) a lack of high-quality supporting cost estimates and schedules; and (3) instability in the content of the baselines. Our work has recommended a number of actions that can be taken to address the problems we identified. Generally, we have recommended that DOD reduce concurrency and more closely follow knowledge based acquisition practices. We also made recommendations designed to reduce testing risk, and to improve schedule and cost reporting. DOD has generally concurred with our recommendations, and has undertaken some actions to reduce acquisition risk, and improve accountability and transparency. This year we found that MDA gained important knowledge about the BMDS system-level performance and individual elements by successfully executing several flight tests. We also found that MDA further improved some of its acquisition practices for managing the European Phased Adaptive Approach (EPAA) and improved the clarity of its resource and schedule baselines. In April 2014, we reported that MDA made progress in demonstrating the systems' capabilities by conducting the first system-level operational flight test in September 2013. This is a significant achievement because it is the first time that MDA conducted an operational flight test that involved multiple elements working simultaneously. The test involved warfighters from several combatant commands, and according to independent testing officials, recreated a potentially realistic scenario. During this test, MDA launched two medium-range ballistic missile targets, including its newly developed air-launched extended-medium range ballistic missile (eMRBM). Both the Aegis SM-3 Block IA and THAAD successfully intercepted their targets, demonstrating progress towards achieving an integrated BMDS. In addition, the Aegis BMD SM-3 Block IB and GMD programs successfully conducted developmental flight tests in 2013 that demonstrated key capabilities and modifications made to resolve prior issues. Specifically, the Aegis BMD SM-3 Block IB intercepted all targets in its last three flight tests. GMD also successfully conducted a non- intercept flight test of its CE-II interceptor, demonstrating the performance of a guidance component that MDA redesigned in response to a December 2010 flight test failure. We also found that DOD improved the acquisition management of EPAA. In our first report on the subject in 2010, we assessed progress of EPAA acquisition planning against six key acquisition principles that synchronize acquisition activities and ensure accountability.that DOD has established testing and acquisition plans for technology We found development and engineering, and had begun work on identifying key stakeholders. This year, we found improvements in these areas. For example, DOD completed identifying EPAA stakeholders and in 2012 issued a directive updating the warfighter role in testing and capability acceptance. Lastly, in April 2014, we found that MDA continued to improve the clarity of its resource and schedule baselines, which are reported to Congress in its annual acquisition report called the BAR. In its 2013 BAR, MDA continued to incorporate useful changes it made last year, and took some additional actions to improve the completeness and clarity of the BAR baselines by: identifying the date of the initial baseline and, if applicable, the date when the initial baseline was most recently revised; explaining most of the significant cost and schedule changes from the current baseline estimates against both the estimates reported in the prior year's BAR and the latest initial baseline; and making the baselines easier to read by removing cluttered formatting such as strikethroughs and highlights that made some of the events listed in past BARs unreadable. Although MDA has taken some steps to improve its acquisitions, the agency continues to face several challenges that we have found in previous reviews. Specifically, it faces challenges stemming from high- risk acquisition practices, as well as challenges in BMDS testing, managing the development of EPAA capabilities, and reporting resource and schedule baselines that support oversight. Until MDA addresses these challenges, the agency and decision makers may not obtain the information needed to assess the capabilities of the BMDS or make informed acquisition and investment decisions. While MDA has gained important insights through testing and taken some steps to improve management and increase transparency, it still faces challenges stemming from higher-risk acquisition strategies that overlap production activities with development activities. While some concurrency is understandable, committing to production and fielding before development is complete often results in performance shortfalls, unexpected cost increases, schedule delays, and test problems. It can also create pressure to keep producing to avoid work stoppages. Our April 2014 report found that Aegis BMD SM-3 Block IB and GMD, which have already produced some of their assets before completing testing, discovered issues during testing that could affect or have affected production. Although both programs demonstrated progress in resolving previous issues, some of which stemmed from their concurrent acquisition strategies, testing revealed new issues. Specifically: An interceptor failure during a September 2013 test of Aegis BMD SM-3 Block IB means that a key component, common to the deployed SM-3 Block IA, may need to be redesigned and flight tested. While the failure review is not yet complete, if a redesign is necessary, interceptors that were already produced may require retrofits. MDA continues to procure new SM-3 Block IBs while it investigates the cause of the failure. A GMD CE-I interceptor failure in a July 2013 flight means that MDA did not demonstrate the interceptor could perform under more challenging conditions than previously tested, further delaying knowledge of the interceptors performance capability. Additionally, the failure precluded confirmation that previous design changes improved performance, and delayed the upcoming test needed to resume production of CE-II interceptors. According to program officials, the failure review is not complete, but the failure could have been caused by a component common to both the CE-I and CE-II interceptors. It is still unclear what, if any, corrective action will be needed. The GMD program has had many years of significant and costly disruptions caused by production getting well ahead of testing and then discovering issues during testing. Consequently, even though some assets have already been produced, MDA has had to add tests that were previously not planned and delay tests that are necessary to understand the system's capabilities and limitations. Additionally, since it has delivered approximately three-fourths of its interceptors, MDA faces difficult and costly decisions on how it will implement corrections from prior test failures. As a result of these development challenges, the GMD program will likely continue to experience delays, disruptions, and cost growth. We made recommendations to address the ongoing issues with both systems in our April 2014 report. First, we recommended that the Secretary of Defense direct MDA's Director to flight test any modifications that may be required to the Aegis SM-3 Block IB, before the Under Secretary of Defense, Acquisitions, Technology, & Logistics approves full production allowing the program to manufacture the remaining interceptors. Second, we also recommended testing the fielded GMD CE- I interceptor in order to complete the original purpose of the failed test to (1) demonstrate the CE-I's effectiveness against a longer range threat in more challenging conditions, and (2) confirm the effectiveness of previous upgrades as well as (3) confirm any new modifications to address the failure work as intended. DOD partially concurred with the recommendation on the Aegis SM-3 Block IB, stating that MDA will verify the efficacy of any modifications by testing and that the full production decision will be vetted through the DOD process. DOD did not agree with the recommendation on GMD, stating that the decision to flight test the interceptor will be made by the Director, MDA, based on the judgment of other stakeholders. In this year's reports, we found that testing has provided less knowledge than initially planned.experienced testing shortfalls, including failures of Aegis and GMD interceptors I mentioned above. The agency also combined, delayed, and deleted some tests, and eliminated test objectives in others. These changes reduced the knowledge expected to be available to understand the capabilities and limitations of the BMDS. Examples of key testing problems we cited in this year's reports are: While MDA accomplished some testing goals, it Operational Integration--Although the September 2013 operational flight test demonstrated layered defense between Aegis BMD and THAAD, the Director, Operational Test and Evaluation concluded that the test did not achieve true integration. Specifically there were system network issues, interoperability limitations, and component failures. For example, the test uncovered several issues with communication networks that are needed for interoperability between the elements. Interoperability is important because it can improve missile defense effectiveness and mitigate some limitations of the systems working alone. Test plan revisions continue to reduce the knowledge planned to be available to understand BMDS performance and inform acquisition decisions. In our March 2014 and April 2014 reports, we found that MDA combined, delayed, and deleted some tests, and eliminated test objectives in others. For example, MDA had to make some adjustments to its September 2013 operational flight test, reducing the number of targets from five to two and removing the participation of more mature elements. The agency also reduced the number of ground tests, which are used to assess performance and interoperability. While MDA added other ground tests to mitigate some effects of this reduction, they are smaller in scope and may not provide the same amount of data about how the systems work together. Previously GAO has made recommendations to improve MDA's ability to gather expected knowledge from testing. For example, we recommended that MDA add non-intercept tests for new targets and ensure that its test plan can absorb unforeseen events, like failures, in order to minimize disruptions to the test schedule. We also recommended that MDA synchronize its testing with development and delivery schedules for its MDA generally concurred with our recommendations, but has assets.not fully implemented them. In March 2014, we found that while MDA made further improvements to the way it manages EPAA, it has yet to develop or implement a complete Specifically, MDA management strategy for synchronizing these efforts.has not established an integrated schedule and has yet to completely define EPAA requirements. As a result, it remains unclear how different EPAA efforts are aligned together and what constitutes success in delivering EPAA capabilities. Considering that defensive capability planned for EPAA increasingly depends on integrated performance of the participating systems, an acquisition approach that identifies and synchronizes all needed activities becomes increasingly important. While flexibility is a hallmark of the EPAA policy, it also increases the risk of delivering less capability than expected without demonstrating the actual performance of what is delivered. In fact, our March 2014 report found concurrency, fragmentation of development activities, and delays for some originally planned capabilities. For example, we found that some systems may be delivered later than originally anticipated for integration activities. This reduces the time to discover and correct issues. We also found schedule delays that reduced both the capability MDA plans to deliver and the understanding of how that capability will perform. For example, although MDA delivered the first set of capability in December 2011, an upgrade originally planned for 2014, is now expected in 2015. Additionally, we found that MDA split the delivery of capability it initially planned to deliver in 2015 into two segments. It now plans to deliver what it calls "basic" or "core" capability in 2015 and the remainder in 2017. Similarly, MDA also realigned its plans for the capability it initially planned for 2018 into two segments-- designating a subset of originally planned capability to be delivered in 2018, with the remainder in 2020 or later. Finally, MDA postponed its plans to conduct a formal system-level end-to-end assessment of EPAA capabilities because of concerns with data reliability associated with such tests. MDA is currently making investments to develop the tools it needs to improve the reliability of their system-level assessments, but they are expected to be ready after two-thirds of EPAA capabilities have been delivered. We have previously made recommendations to improve management of EPAA, which are highlighted in this year's report. Although DOD generally concurred with these recommendations, it has not yet fully implemented them. Although we found in March 2014 that MDA took some additional steps to improve the clarity of its resource and schedule baselines, this was the fourth year that we have found MDA's resource baselines are not sufficiently reliable to support oversight. Additionally, issues with the content and presentation of the schedule baselines continue to limit the usefulness of the information for decision makers. According to agency officials, MDA is taking steps to improve the reliability of their resource baselines, however, until MDA completes these efforts, its baselines will not be useful for decision makers to gauge progress. Since MDA first reported baselines in June 2010, we have found that the underlying information supporting its resource baselines does not meet best practice standards for high-quality cost estimates. baselines reported in its 2013 BAR remain unreliable because the agency is still in the process of improving the quality of the cost estimates that support its baselines. For example, MDA has not fully implemented its cost estimating handbook. In April 2013, we reported that, in June 2012, MDA completed an internal Cost Estimating Handbook, largely based on GAO's Cost Estimating and Assessment Guide which, if implemented, could help address nearly all the shortfalls we identified. According to MDA officials, the agency is still in the process of applying that handbook to its cost estimates and therefore revised estimates for BMDS elements included in the 2013 BAR were not ready for our review. MDA has not obtained independent cost estimates of the reported baselines. Officials from DOD's Office of the Director for Cost Assessment and Program Evaluation told us that although they examined costs for some BMDS elements over the last two years, they have not completed a formal independent cost estimate for a BMDS element since 2010. GAO, GAO Cost Estimating and Assessment Guide, GAO-09-3SP (Washington, D.C.: March 2009). MDA's cost estimates reported in the 2013 BAR do not include operation and support costs funded by individual military services. In April 2013, we found that MDA was not reporting the operation and support costs borne by other military services and concluded that as a result MDA's reported costs may significantly understate the full costs for some BMDS elements. We recommended MDA include these costs in its resource baselines reported in the BAR.full costs of DOD programs, but the department stated that the BAR should only include content for which MDA is responsible. However, limiting the baseline reporting to only MDA costs precludes decision makers from having insight into all the costs associated with MDA's weapons systems. We continue to believe that reporting these costs would aid both departmental and congressional decision makers as they make difficult choices of where to invest limited resources.DOD does not currently report the full costs for MDA's missile defense acquisitions. DOD agreed that decision makers should have insight into the In the National Defense Authorization Act for Fiscal Year 2014, Congress took steps to address concerns over MDA's cost estimates. As a result, we did not make any new recommendations regarding cost this year. However, we plan to continue to monitor MDA's progress because establishing high-quality cost estimates that are accurate, credible, and complete is fundamental to creating realistic resource baselines. In April 2014, we also found that assessing MDA's progress in achieving its schedule goals is difficult because MDA's 2013 schedule baselines are not presented in a way that allows decision makers to understand or easily monitor progress.identify numerous events, but provide little information on the events and why they are important. In addition, MDA's schedule baselines do not present any comparisons of event dates. Because MDA's schedule baselines only present current event dates, decision makers do not have the ability to see if and how these dates have changed. For instance, MDA's schedule baselines We recommended that the Secretary of Defense direct the MDA Director to improve the content of the schedule baselines by highlighting critical events, explaining what these events entail and why they are important, and by presenting information in a format that allows identification of changes from the previous BAR as well as from the initial baseline. DOD concurred with our recommendation. This concludes my statement, I am happy to answer any questions you have. For future questions about this statement, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to the work this statement is based on include David B. Best and Patricia Lentini, Assistant Directors; Susan C. Ditto; Aryn Ehlow; Wiktor Niewiadomski; John H. Pendleton; Karen Richey; Brian T. Smith; Jennifer Spence; Steven Stern; Robert Swierczek; Jay Tallon; Brian Tittle; and Hai V. Tran; Alyssa Weir; and Gwyneth B. Woolwine. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. 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In order to meet its mission, MDA is developing a diverse group of BMDS components including (1) land-, sea-, and space-based sensors; (2) interceptors; and (3) a battle management system. These systems can be integrated in different ways to provide protection in various regions of the world. Since its inception in 2002, MDA has been given flexibility in executing the development and fielding of the ballistic missile defense system. This statement addresses recent MDA progress and the challenges it faces with its acquisition management. It is based on GAO's March and April 2014 reports and prior reports on missile defense. The Department of Defense's (DOD) Missile Defense Agency (MDA) made progress in its goals to improve acquisition management, and accountability and transparency. The agency gained important knowledge for its Ballistic Missile Defense System (BMDS) by successfully conducting several important tests, including the first missile defense system-level operational flight test. Additionally, key programs successfully conducted developmental flight tests that demonstrated key capabilities and modifications made to resolve prior issues. MDA also made some improvements to transparency and accountability. For example, MDA improved the management of its acquisition-related efforts to deploy a missile defense system in Europe and MDA continued to improve the clarity of its resource and schedule baselines, which are reported to Congress for oversight. Although some progress has been made, MDA acquisitions are still high risk, due to inherent technical and integration challenges, tight timeframes, strategies that overlap development and production activities, and incomplete management tools. More specifically: MDA faces challenges stemming from higher-risk acquisition strategies that overlap production activities with development activities. While some concurrency is understandable, committing to production and fielding before development is complete often results in performance shortfalls, unexpected cost increases, schedule delays, and test problems. GAO found that the Aegis Ballistic Missile Defense SM-3 Block IB and Ground-based Midcourse Defense programs, which have already produced some of their assets before completing testing, discovered issues during testing that have affected or continue to affect production. Testing continues to fall short of goals. For example, the first ever system-level operational flight test failed to demonstrate true integration. MDA also combined, delayed, and deleted some tests, and eliminated test objectives in other tests. These challenges reduced the knowledge they had planned to obtain in order to understand the capabilities and limitations of the BMDS. MDA has not yet fully developed or implemented a complete management strategy for synchronizing its efforts to deploy missile defense in Europe. As a result, it remains unclear how different European Phased Adaptive Approach (EPAA) efforts are aligned together and what constitutes success in delivering capabilities in Europe. Issues with the content and presentation of resource and schedule baselines continue to limit their usefulness as management tools. For the fourth year, GAO has found that MDA's cost estimates are unreliable for some BMDS elements and do not include certain costs for military services which may significantly understate total costs. Recently, Congress took steps to require that improvements be made to MDA's cost estimates, so GAO did not make any new cost recommendations. MDA's schedule baselines continue to be presented in a way that makes it difficult to assess progress. For instance, MDA's schedule baselines identify numerous events, but provide little information on the events and why they are important. In April 2014, GAO recommended that MDA verify any changes needed for the SM-3 Block IB missile through flight testing before approving full production; retest the fielded GMD interceptor to demonstrate performance and the effectiveness of changes; and take actions to improve the clarity of its schedule baselines. DOD partially concurred with the recommendation on the SM-3, stating that MDA will verify the efficacy of any modifications by testing and that the production decision will be vetted through the DOD process. DOD did not agree with the recommendation on GMD, stating that the decision to flight test the interceptor will be made by the Director, MDA, based on the judgment of other stakeholders. GAO previously made recommendations on EPAA and testing. DOD generally concurred with them. GAO continues to believe all recommendations are valid.

TSA is responsible for securing all modes of transportation while facilitating commerce and the freedom of movement for the traveling public. Passenger prescreening is one program among many that TSA uses to secure the domestic aviation sector. The process of prescreening passengers--that is, determining whether airline passengers might pose a security risk before they reach the passenger-screening checkpoint--is used to focus security efforts on those passengers that represent the greatest potential threat. Currently, U.S. air carriers conduct passenger prescreening by comparing passenger names against government-supplied terrorist watch lists and applying the Computer-Assisted Passenger Prescreening System rules, known as CAPPS rules. Following the events of September 11, and in accordance with the requirement set forth in the Aviation and Transportation Security Act that a computer-assisted passenger prescreening system be used to evaluate all passengers before they board an aircraft, TSA established the Office of National Risk Assessment to develop and maintain a capability to prescreen passengers in an effort to protect U.S. transportation systems and the public against potential terrorists. In March 2003, this office began developing the second-generation computer-assisted passenger prescreening system, known as CAPPS II, to provide improvements over the current prescreening process, and to screen all passengers flying into, out of, and within the United States. Based in part on concerns about privacy and other issues expressed by us and others, the Department of Homeland Security (DHS) canceled the development of CAPPS II in August 2004. Shortly thereafter, it announced that it planned to develop a new passenger prescreening program called Secure Flight. In contrast to CAPPS II, Secure Flight, among other changes, will only prescreen passengers flying domestically within the United States, rather than passengers flying into and out of the United States. Also, the CAPPS rules will not be implemented as part of Secure Flight, but rather the rules will continue to be applied by commercial air carriers. As of February 2006, TSA planned to operate Secure Flight on the Transportation Vetting Platform (TVP)--the underlying infrastructure (hardware and software) developed to support the Secure Flight application, including security, communications, and data management and, the Secure Flight application was to perform the functions associated with receiving, vetting, and returning requests related to the determination of whether passengers are on government watch lists. This application was also to be configurable--meaning that it could be quickly adjusted to reflect changes to workflow parameters. In May 2006, TSA officials stated that the agency was considering other approaches for integrating the Secure Flight TVP and application functions in a different configuration as part of rebaselining the program. In its rebaselining effort, this and other aspects of Secure Flight are currently being reviewed, and policy decisions regarding the operations of the program have not been finalized. As envisioned under Secure Flight, when a passenger made flight arrangements, the organization accepting the reservation, such as the air carrier's reservation office or a travel agent, would enter passenger name record (PNR) information obtained from the passenger, which would then be stored in the air carrier's reservation system. While the government would be asking for only portions of the PNR, the PNR data could include the passenger's name, phone number, number of bags, seat number, and form of payment, among other information. Approximately 72 hours prior to the flight, portions of the passenger data contained in the PNR would be sent to Secure Flight through a secure network connection provided by DHS's CBP. Reservations or changes to reservations that were made less than 72 hours prior to flight time would be sent immediately to TSA through CBP. Upon receipt of passenger data, TSA planned to process the passenger data through the Secure Flight application running on the TVP. During this process, Secure Flight would determine if the passenger data matched the data extracted daily from TSC's Terrorist Screening Database (TSDB)-- the information consolidated by TSC from terrorist watch lists to provide government screeners with a unified set of terrorist-related information. In addition, TSA would screen against its own watch list composed of individuals who do not have a nexus to terrorism but who may pose a threat to aviation security. In order to match passenger data to information contained in the TSDB, TSC planned to provide TSA with an extract of the TSDB for use in Secure Flight and provide updates as they occur. This TSDB subset would include all individuals classified as either selectees (individuals who are selected for additional security measures prior to boarding an aircraft) or no-flys (individuals who would be denied boarding unless they are cleared by law enforcement personnel). To perform the match, Secure Flight was to compare the passenger data, TSDB, and other watch list data using automated name-matching technologies. When a possible match was generated, TSA and potentially TSC analysts would conduct a manual review comparing additional law enforcement and other government information with passenger data to determine if the person could be ruled out as a possible match. TSA was to return the matching results to the air carriers through CBP. Figure 1 illustrates how Secure Flight was intended to operate as of February 2006. As shown in figure 1, when the passenger checked in for the flight at the airport, the passenger was to receive a level of screening based on his or her designated category. A cleared passenger was to be provided a boarding pass and allowed to proceed to the screening checkpoint in the normal manner. A selectee passenger was to receive additional security scrutiny at the screening checkpoint. A no-fly passenger would not be issued a boarding pass. Instead, appropriate law enforcement agencies would be notified. Law enforcement officials would determine whether the individual would be allowed to proceed through the screening checkpoint or if other actions are warranted, such as additional questioning of the passenger or taking the passenger into custody. Based on its rebaselining effort, TSA may modify this concept of operations for Secure Flight. As we testified in February 2006, TSA had not conducted critical activities in accordance with best practices for large-scale information technology programs. Further, TSA had not followed a disciplined life cycle approach in developing Secure Flight, in which all phases of the project are defined by a series of orderly phases and the development of related documentation. Program officials stated that they had instead used a rapid development method that was intended to enable them to develop the program more quickly. However, as a result of this approach, the development process had been ad hoc, with project activities conducted out of sequence. For example, program officials declared the design phase complete before requirements for designing Secure Flight had been detailed. Our evaluations of major federal information technology programs, and research by others, have shown that following a disciplined life cycle management process decreases the risks associated with acquiring systems. As part of the life cycle process, TSA must define and document Secure Flight's requirements--including how Secure Flight is to function and perform, the data needed for the system to function, how various systems interconnect, and how system security is achieved. We found that Secure Flight's requirements documentation contained contradictory and missing information. TSA officials acknowledged that they had not followed a disciplined life cycle approach in developing Secure Flight, but stated that in moving forward, they would follow TSA's standard development process. We also found that while TSA had taken steps to implement an information security management program for protecting Secure Flight information and assets, its efforts were incomplete, based on federal standards and industry best practices. We reported that without a completed system security program, Secure Flight may not be adequately protected against unauthorized access and use or disruption, once the program becomes operational. Further, TSA had proceeded with Secure Flight development without an effective program management plan that contained up-to-date program schedules and cost estimates. TSA officials stated they had not maintained an updated schedule in part because the agency had not promulgated a necessary regulation requiring commercial air carriers to submit certain passenger data needed to operate Secure Flight, and air carrier responses to this regulation would impact when Secure Flight would be operational and at what cost. While we recognized that program unknowns introduce uncertainty into the program-planning process, uncertainty is a practical reality in planning all programs and is not a reason for not developing plans, including cost and schedule estimates that reflect known and unknown aspects of the program. Prior to TSA's rebaselining effort of Secure Flight, several oversight reviews of the program had been conducted that raised questions about program management, including the lack of fully defined requirements. DHS and TSA had executive and advisory oversight mechanisms in place to oversee Secure Flight, including the DHS Investment Review Board-- designed to review certain programs at key phases of development to help ensure they met mission needs at expected levels of costs and risks. However, the DHS Investment Review Board and other oversight groups had identified problems with Secure Flight's development. Specifically, in January 2005, the Investment Review Board withheld approval of the TVP, which supported Secure Flight operations, to proceed from development and testing into production and deployment until a formal acquisition plan, a plan for integrating and coordinating Secure Flight with other DHS people-screening programs, and a revised acquisition program baseline had been completed. In addition, an independent working group within the Aviation Security Advisory Committee, composed of government, privacy, and security experts, reported in September 2005 that TSA had not produced a comprehensive policy document for Secure Flight that could define oversight or governance responsibilities, nor had it provided an accountability structure for the program. TSA has taken actions that recognize the need to instill more rigor and discipline into the development and management of Secure Flight, and suspended its development efforts while it rebaselines the program. This rebaselining effort includes reassessing program goals and capabilities and developing a new schedule and cost estimates. Although TSA officials stated that they will use a disciplined life cycle approach when moving forward with the rebaselined program, officials have not identified when their rebaselining effort will be completed. As we testified in February 2006, TSA had taken steps to collaborate with Secure Flight stakeholders--CBP, TSC, and domestic air carriers--whose participation is essential to ensuring that passenger and terrorist watch list data are collected and transmitted for Secure Flight operations, but additional information and testing are needed to enable stakeholders to provide the necessary support for the program. TSA had, for example, drafted policy and technical guidance to help inform air carriers of their Secure Flight responsibilities, and had begun receiving feedback from the air carriers on this information. TSA was also in the early stages of coordinating with CBP and TSC on broader issues of integration and interoperability related to other people-screening programs used by the government to combat terrorism. Prior to its rebaselining effort, TSA had conducted preliminary network connectivity testing between TSA and federal stakeholders to determine, for example, how information would be transmitted from CBP to TSA and back. However, these tests used only dummy data and were conducted in a controlled environment, rather than in a real-world operational environment. According to CBP, without real data, it was not possible to conduct stress testing to determine if the system could handle the volume of data traffic that would be required by Secure Flight. TSA acknowledged it had not determined what the real data volume requirements would be, and could not do so until the regulation for air carriers was issued and their data management role had been finalized. All key program stakeholders we interviewed stated that additional information was needed before they could finalize their plans to support Secure Flight operations. Although CBP, TSC, and air carrier officials we interviewed through January 2006 acknowledged TSA's outreach efforts, they cited several areas where additional information was needed from TSA before they could fully support Secure Flight. Several CBP officials stated, for example, that they could not proceed with establishing connectivity with all air carriers until DHS published the rule--the regulation that would specify what type of information was to be provided for Secure Flight--and the air carriers submitted their plans for providing this information. In addition, a TSC official stated that until TSA provided estimates of the volume of potential name matches that TSC would be required to screen, TSC could not make decisions about required resources. TSA's ongoing coordination of prescreening and name-matching initiatives with CBP and TSC could impact how Secure Flight is implemented and require stakeholders to alter their plans made to support the program. In January 2006, TSA officials stated that they are coordinating more closely with CBP's international prescreening initiatives for passengers on flights bound for the United States. The Air Transport Association and the Association of European Airlines--organizations representing air carriers--had requested, among other things, that both domestic and international passenger prescreening function through coordinated information connections and avoid unnecessary duplication of communications, programming, and information requirements. In addition, TSC has an initiative under way to, among other things, better safeguard watch list data. At present, TSC exports watch list data to other federal agencies for use in their screening efforts or processes for examining documents and records related to terrorism. However, TSC is currently developing a new system, Query, whereby watch list data would not be exported, but rather would be maintained by TSC. Query would serve as a common shared service that would allow agencies to directly search the TSDB using TSC's name-matching technology for their own purposes. If TSC chooses to implement Query, TSA may be required to modify the system architecture for Secure Flight in order to accommodate the new system. Due to delays in Secure Flight's development and uncertainty about its future, officials from two air carriers told us after our February 2006 testimony that they were enhancing their respective name-matching systems because they were unsure when and whether TSA would be taking over the name-matching function through Secure Flight. While these efforts may improve the accuracy in each air carrier's individual name-matching system, the improvements will only apply to their respective systems and could further exacerbate differences that currently exist among the various air carriers' systems. These differences may result in varying levels of effectiveness in the matching of passenger names against terrorist watch lists, which was a primary factor that led to the government's effort to take over the name-matching function through Secure Flight. As of February 2006, several activities were under way, or were about to be decided, that would affect Secure Flight's effectiveness. For example, TSA had tested name-matching technologies to determine what type of passenger data would be needed to match against terrorist watch list data. These tests had been conducted using historical data in a controlled, rather than real-world environment, but additional testing was needed to learn more about how these technologies would perform in an operational environment. TSA also had not yet conducted stress testing to determine how the system would handle peak data volumes. Further, due to program delays and the program rebaselining, TSA had not conducted a comprehensive end-to-end testing to verify that the entire system would function as intended, although it had planned to do so by the middle of 2005. Prior to its rebaselining effort, we further reported that TSA had not made key policy decisions for determining the passenger information that air carriers would be required to collect, the name-matching technologies that would be used to vet passenger names against terrorist watch list data, and thresholds that would be set to determine the relative volume of passengers who are to be identified as potential matches against the database. For example, TSA will need to decide which data attributes air carriers will be required to provide in passenger data to be used to match against data contained in the TSDB, such as full first, middle, and last name plus other discrete identifiers, such as date of birth. Using too many data attributes can increase the difficulty of conducting matching, while using too few attributes can create an unnecessarily high number of incorrect matches due to, among other things, the difficulty in differentiating among similar common names without further information. In addition, TSA must determine what type or combination of name- matching technologies to acquire and implement for Secure Flight, as different technologies have different capabilities. For example, earlier TSA PNR testing showed that some name-matching technologies are more capable than others at detecting significant name modifications allowing for the matching of two names that contain some variation. Detecting variation is important because passengers may intentionally make alternations to their names in an attempt to conceal their identities. In addition, unintentional variations can result from different translations of non-native names or data entry errors. TSA had planned to finalize decisions on these factors as system development progressed. However, until TSA completes its program rebaselining, data requirements for the program will remain unknown. As we reported in February 2006, two additional factors will play an important role in the effectiveness of Secure Flight. These factors include (1) the accuracy and completeness of data contained in TSC's TSDB and in passenger data submitted by air carriers, and (2) the ability of TSA and TSC to identify false positives and resolve possible mistakes during the data-matching process to minimize inconveniencing passengers. Regarding data quality and accuracy, in a review of the TSC's role in Secure Flight, the Department of Justice Office of Inspector General found that TSC could not ensure that the information contained in its TSDB was complete or accurate. To address accuracy, TSA and TSC had planned to work together to identify false positives--passengers inappropriately matched against data contained in the terrorist-screening database--by using intelligence analysts to monitor the accuracy of data matches. Related to the accuracy of PNR data, we reported that TSA had planned to describe the required data attributes that must be contained in passenger data provided to TSA in a forthcoming rule. However, the accuracy and completeness of the information contained in the passenger data record will still be dependent on the air carriers' reservations systems, the passengers themselves, and the air carriers' modifications of their systems for transmitting the data in the proper format. Prior TSA testing found that many passenger data records submitted by air carriers were found to be inaccurate or incomplete, creating problems during the automated name- matching process. Prior to its rebaselining effort, TSA had also reported that it planned to work with TSC to identify false positives as passenger data are matched against data in the TSDB, and to resolve mistakes to the extent possible before inconveniencing passengers. The agencies were to use intelligence analysts during the actual matching of passenger data to data contained in the TSDB to increase the accuracy of data matches. When TSA's name- matching technologies indicated a possible match, TSA analysts were to manually review all of the passenger data and other information to determine if the passenger could be ruled out as a match to the TSDB. If a TSA analyst could not rule out a possible match, the record would be forwarded to a TSC analyst to conduct a further review using additional information. Until TSA completes its rebaselining effort, it is uncertain whether this or another process will be used to help mitigate the misidentification of passengers. An additional factor that could impact the effectiveness of Secure Flight in identifying known or suspected terrorists is the system's inability to identify passengers who assume the identity of another individual by committing identity theft, or who use false identifying information. Secure Flight was neither intended nor designed to address these vulnerabilities. TSA is aware of, and plans to address, the potential for Secure Flight to adversely affect travelers' privacy and their rights. However, as we testified in February 2006, TSA, as part of its requirements development process, had not clearly identified the privacy impacts of the envisioned system or the full actions it planned to take to mitigate them. Because Secure Flight's system development documentation did not fully address how passenger privacy protections were to be met, it was not possible to assess potential system impacts on individual privacy protections, as of February 2006. Further, such an assessment will not be possible until TSA determines what passenger data will be required and how privacy protections will be addressed in the rebaselined program. The Privacy Act and the Fair Information Practices--a set of internationally recognized privacy principles that underlie the Privacy Act--limit the collection, use, and disclosure of personal information by federal agencies. TSA officials have stated that they are committed to meeting the requirements of the Privacy Act and the Fair Information Practices. However, it is not evident how this will be accomplished because TSA has not decided what passenger data elements it plans to collect, how such data will be provided by stakeholders, or how a restructuring that may result from its program rebaselining will impact its requirements for passenger data. Prior to the rebaselining effort, TSA was in the process of developing but had not issued the systems-of-records notice required by the Privacy Act, or the privacy impact assessment required by the E-Government Act, that would describe how TSA will protect passenger data once Secure Flight becomes operational. Moreover, privacy requirements had not been incorporated into the Secure Flight system development process to explain whether personal information would be collected and maintained in the system in a manner that complies with privacy and security requirements. In our review of Secure Flight's system requirements prior to TSA announcing its rebaselining, we found that privacy concerns were broadly defined in functional requirements documentation, which states that the Privacy Act must be considered in developing the system. However, these broad functional requirements had not been translated into specific system requirements. Until TSA determines the relevancy of these requirements and notices, privacy protections and impacts cannot be assessed. Further, Congress mandated that Secure Flight include a process whereby aviation passengers determined to pose a threat to aviation security may appeal that determination and correct erroneous information contained within the prescreening system. While TSA has not yet determined how it will meet this congressional mandate, it currently has a process in place that allows passengers who experience delays under the current prescreening conducted by air carriers to submit a passenger identity verification form to TSA and request that the agency place their names on a cleared list. If, upon review, TSA determines that the passenger's identity is distinct from the person on a watch list, TSA will add the passenger's name to its cleared list, and will forward the updated list to the air carriers. TSA will also notify the passenger of his or her cleared status and explain that in the future the passenger may still experience delays. Recently, TSA has automated the cleared list process, enabling the agency to further mitigate inconvenience to travelers on the cleared list. GAO has an ongoing review examining TSA's redress process for assisting passengers misidentified under the screening program. According to TSA officials, no final decisions have been made regarding how TSA will address redress requirements, but information on the process will be contained within the privacy notices released in conjunction with the forthcoming regulation. In May 2006, Secure Flight officials stated that concerns for privacy and redress were being addressed as part of their rebaselining effort. TSA has recognized the challenges it faces in developing Secure Flight and has undertaken efforts to rebaseline the program. We believe this rebaselining effort is a positive step in addressing the issues facing the program. To make and demonstrate progress on any large-scale information technology program, such as Secure Flight, an agency must first adequately define program capabilities that are to be provided, such as requirements related to performance, security, privacy, and data content and accuracy. These requirements can then in turn be used to produce reliable estimates of what these capabilities will cost, when they will be delivered, and what mission value or benefits will accrue as a result. For Secure Flight, well-defined requirements would provide a guide for developing the system and a baseline to test the developed system to ensure that it delivers necessary capabilities, and would help to ensure that key program areas--such as security, system connectivity, and privacy and redress protections--are appropriately managed. When we reported on Secure Flight in March 2005, TSA had committed to take action on our recommendations to manage the risks associated with developing and implementing Secure Flight, including finalizing the concept of operations, system requirements, and test plans; completing formal agreements with CBP and air carriers to obtain passenger data; developing life cycle cost estimates and a comprehensive set of critical performance measures; issuing new privacy notices; and putting a redress process in place. When we testified in February 2006, TSA had made some progress in all of these areas, including conducting further testing of factors that could influence system effectiveness and corroborating with key stakeholders. However, TSA had not completed any of the actions it had scheduled to accomplish. In particular, TSA had not developed complete system requirements or conducted important system testing, made key decisions that would impact system effectiveness, or developed a program management plan and a schedule for accomplishing program goals. In conjunction with its rebaselining effort, TSA has taken actions that recognize the need to instill more rigor and discipline into the development and management of Secure Flight, including hiring a program director to administer Secure Flight and a program manager with information systems program management credentials. We support these efforts and believe that proceeding with operational testing and completing other key program activities should not be pursued until TSA demonstrates that it has put in place a more disciplined life cycle process as part of its rebaselining effort. Mr. Chairman, this concludes my prepared statement. I will be pleased to respond to any questions that you or other members of the committee have at the appropriate time. For further information about this testimony, please contact Cathleen Berrick, at 202-512-3404 or at [email protected], or Randolph C. Hite at 202-512-6256 or at [email protected]. Other key contributors to this statement were J. Michael Bollinger, Amy Bernstein, Mona Nichols Blake, Christine Fossett, and Allison G. Sands. Aviation Security: Significant Management Challenges May Adversely Affect Implementation of the Transportation Security Administration's Secure Flight Program. GAO-06-374T. Washington, D.C.: February 9, 2006. Aviation Security: Transportation Security Administration Did Not Fully Disclose Uses of Personal Information during Secure Flight Program Testing in Initial Privacy Notices, but Has Recently Taken Steps to More Fully Inform the Public. GAO-05-864R. Washington, D.C.: July 22, 2005. Secure Flight Development and Testing Under Way, but Risks Should Be Managed as System Is Further Developed. GAO-05-356 Washington, D.C.: March 28, 2005. TSA's Modifications to Rules for Prescreening Passengers. GAO-05-445SU Washington D.C.: March 28, 2005. Measures for Testing the Impact of Using Commercial Data for the Secure Flight Program. GAO-05-324 Washington, D.C.: February 23, 2005. Aviation Security: Improvement Still Needed in Federal Aviation Security Efforts. GAO-04-592T Washington D.C.: March 30, 2004. Aviation Security: Challenges Delay Implementation of Computer- Assisted Passenger Prescreening System. GAO-04-504T Washington, D.C.: March 17, 2004. Computer-Assisted Passenger Prescreening System Faces Significant Implementation Challenges. GAO-04-385 Washington, D.C.: February 12, 2004. A system of due process exists whereby aviation passengers determined to pose a threat are either delayed or prohibited from boarding their scheduled flights by TSA may appeal such decisions and correct erroneous information contained in CAPPS II or Secure Flight or other follow-on/successor programs. The underlying error rate of the government and private databases that will be used to both establish identity and assign a risk level to a passenger will not produce a large number of false positives that will result in a significant number of passengers being treated mistakenly or security resources being diverted. TSA has stress-tested and demonstrated the efficacy and accuracy of all search technologies in CAPPS II or Secure Flight or other follow- on/successor programs and has demonstrated that CAPPS II or Secure Flight or other follow-on/successor programs can make an accurate predictive assessment of those passengers who may constitute a threat to aviation. The Secretary of Homeland Security has established an internal oversight board to monitor the manner in which CAPPS II or Secure Flight or other follow-on/successor programs are being developed and prepared. TSA has built in sufficient operational safeguards to reduce the opportunities for abuse. Substantial security measures are in place to protect CAPPS II or Secure Flight or other follow-on/successor programs from unauthorized access by hackers or other intruders. TSA has adopted policies establishing effective oversight of the use and operation of the system. There are no specific privacy concerns with the technological architecture of the system. Legislative mandated issue (short title) TSA has, in accordance with the requirements of section 44903 (j)(2)(B) of title 49, United States Code, modified CAPPS II or Secure Flight or other follow-on/successor programs with respect to intrastate transportation to accommodate states with unique air transportation needs and passengers who might otherwise regularly trigger primary selectee status. Appropriate life cycle cost estimates and expenditure and program plans exist. The results discussed in this testimony are based on our review of available documentation on Secure Flight's systems development and oversight, policies governing program operations, our past reports on the program, and interviews with Department of Homeland Security officials, TSA program officials and their contractors, and other federal officials who are key stakeholders in the Secure Flight program. Throughout our ongoing reviews of Secure Flight, we have reviewed TSA's System Development Life Cycle Guidance for developing information technology systems and other federal reports describing best practices in developing and acquiring these systems. We also reviewed draft TSA documents containing information on the development and testing of Secure Flight, including concept of operations, requirements, test plans, and test results. We also reviewed reports from the U.S. Department of Justice Office of the Inspector General that reviewed the Secure Flight program and reports from two oversight groups that provided advisory recommendations for Secure Flight: DHS's Privacy and Data Integrity Advisory Committee and TSA's Aviation Security Advisory Committee Secure Flight Working Group. We interviewed senior-level TSA officials, including representatives from the Office of Transportation Threat Assessment and Credentialing, which is responsible for Secure Flight, and the Office of Transportation Security Redress, to obtain information on Secure Flight's planning, development, testing, and policy decisions. We also interviewed representatives from the U.S. Customs and Border Protection and Terrorist Screening Center to obtain information about stakeholder coordination. We also interviewed officials from several air carriers and representatives from aviation trade organizations regarding issues related to Secure Flight's development and implementation. In addition, we attended conferences on name-matching technologies sponsored by MITRE (a federally funded research and development corporation) and the Office of the Director of National Intelligence. This testimony includes work accomplished for our March 2005 report and our February 2006 testimony, and work conducted from February 2006 to June 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.

After the events of September 11, 2001, the Transportation Security Administration (TSA) assumed the function of passenger prescreening--or the matching of passenger information against terrorist watch lists to identify persons who should undergo additional security scrutiny--for domestic flights, which is currently performed by the air carriers. To do so, TSA has been developing Secure Flight. This testimony covers TSA's progress and challenges in (1) developing, managing, and overseeing Secure Flight; (2) coordinating with key stakeholders critical to program operations; (3) addressing key factors that will impact system effectiveness; and (4) minimizing impacts on passenger privacy and protecting passenger rights. For over 3 years, TSA has faced challenges in developing and implementing the Secure Flight program, and in early 2006, it suspended Secure Flight's development to reassess, or rebaseline, the program. TSA's rebaselining effort is currently under way, and final decisions regarding the future direction of the program have not been made. In our most recent report and testimony, we noted that TSA had made some progress in developing and testing the Secure Flight program, but had not followed a disciplined life cycle approach to manage systems development or fully defined system requirements. We also reported that TSA was proceeding to develop Secure Flight without a program management plan containing program schedule and cost estimates. Oversight reviews of the program had also raised questions about program management. Secure Flight officials stated that as they move forward with the rebaselined program, they will be following a more rigorous and disciplined life cycle process for Secure Flight. We support TSA's rebaselining effort, and believe that the agency should not move forward with the program until it has demonstrated that a disciplined life cycle process is being followed. We also reported that TSA had taken steps to collaborate with Secure Flight stakeholders whose participation is essential to ensuring that passenger and terrorist watch list data are collected and transmitted to support Secure Flight. However, key program stakeholders--including the U.S. Customs and Border Protection, the Terrorist Screening Center, and air carriers--stated that they needed more definitive information about system requirements from TSA to plan for their support of the program. In addition, we reported that several activities that will affect Secure Flight's effectiveness were under way or had not yet been decided. For example, TSA conducted name-matching tests that compared passenger and terrorist screening database information to determine what type of passenger data would be needed for Secure Flight's purposes. However, TSA had not yet made key policy decisions that could significantly impact program operations, including what passenger data it would require air carriers to provide and the name-matching technologies it would use. Further, Secure Flight's system development documentation did not fully identify how passenger privacy protections were to be met, and TSA had not issued the privacy notices that described how it would protect passenger data once Secure Flight became operational. As a result, it was not possible to assess how TSA is addressing privacy concerns. Secure Flight officials stated that they plan to address privacy issues and finalize its redress polices in conjunction with rebaselining the program.

In 1994, six Members of Congress expressed concern about a White House official's use of a military helicopter to visit Camp David and a golf course on May 24, 1994. Accordingly, we were asked to determine (1) the frequency of helicopter flights by White House staff from January 21, 1993, to May 24, 1994, and (2) whether applicable White House procedures were followed in requesting and approving the May 24 trip to Camp David and the golf course. Since 1976, the Marine Corps HMX-1 Squadron in Quantico, Virginia, has been responsible for providing helicopter support to the White House. The squadron is specifically tasked to fly the President, Vice President, First Lady, wife of the Vice President, and visiting Heads of State. White House staff may be authorized to use HMX-1 helicopters when they are directly supporting the President, Vice President, First Lady, and wife of the Vice President or conducting immediate White House activities. Manual records of flights taken by, or in support of, the President, Vice President, First Lady, wife of the Vice President, or Heads of State, are maintained at the squadron's Quantico facilities. According to HMX-1 manual records, approximately 1,200 flights were flown in support of the President, Vice President, First Lady, wife of the Vice President, and Heads of State during the 16 months before May 24, 1994. These records indicated that, as previously disclosed by the White House, staff members flew in military helicopters 14 times without the President, Vice President, First Lady, wife of the Vice President, or Heads of State during this period. We performed several tests, which I will discuss, to verify the completeness and accuracy of the HMX-1 manual records. Our work did not identify any additional White House staff flights. We reviewed approximately 1,200 manual records (HMX-1 after-action reports) of flights by or in support of the President, Vice President, First Lady, wife of the Vice President, and Heads of State. The after-action report, which is filed by the pilot, identifies the passengers, an itinerary, and the flight crew and is retained by the HMX-1 White House Liaison Office in Quantico. Among the after-action reports we examined were the 14 flights previously reported by the White House as the only flights taken by White House staff when the President, Vice President, First Lady, wife of the Vice President, or Heads of State were not on board. According to officials from the White House Military Office and the HMX-1 Squadron and an associate counsel to the President, the after-action reports we reviewed covered all White House-related flights between January 21, 1993, and May 24, 1994. We performed four tests to independently verify the completeness and accuracy of the manual records maintained by the HMX-1 Squadron. As our first test, we compared the President's itinerary, as reported in the Weekly Compilation of Presidential Documents, with HMX-1 after-action reports. We then listed instances in which the President had traveled, but no after-action reports existed. A White House official then provided us documents from the Presidential Diarist and the Secret Service. These documents verified that the President had used other forms of transportation on the days in question. Next, we compared the records maintained at HMX-1 with the flight records in the Navy's automated Naval Flight Record Subsystem. This database is part of a larger automated flight record system used to track and manage all naval aircraft flights. The database is maintained by the Navy and the Marine Corps and contains flight information provided by pilots after each flight. The automated data we obtained covered 6,120 flights of HMX-1 aircraft from January 21, 1993, to May 24, 1994. We found the records maintained at HMX-1 to be more complete than those maintained in the database. Third, during our review of the previously reported 14 White House staff flights, we found that 10 had a squadron-specific mission purpose code. According to a Marine Corps official, pilots are to assign this HMX-1 squadron-specific mission purpose code to all flights for logistical support of an executive aircraft, as well as any flight by White House staff that is not directly associated with a flight taken by the President, Vice President, First Lady, wife of the Vice President, or Heads of State. We searched the automated database for all flights with this specific code and found 72 more flights. Of the 72 flights, 34 were included in the records we had reviewed at HMX-1. The remaining 38 flights had no after-action reports. Because it was unclear whether after-action reports should have been completed for the 38 flights, we asked for clarification. We ultimately confirmed why the 38 flights had not been included in the flight records we reviewed at the HMX-1 Squadron. Some flights with no after-action reports included flights to and from contractors for maintenance, flights to test facilities, and support for presidential travel. As one last check that the squadron had not inadvertently omitted a flight from the after-action reports we had reviewed, we interviewed 52 pilots still assigned to the squadron who had flown a White House mission during the 16-month period of our review. In the presence of officials from the White House and the HMX-1 Squadron, we asked the pilots if they had ever flown a White House mission without filing an after-action report. All the pilots said that they always filed after-action reports when they flew missions in support of the White House. At the time of the May 24 trip to Camp David and a golf course, White House policy required that White House Military Office officials approve all HMX-1 helicopter travel by White House staff. The former Deputy Director of the White House Military Office stated that he had approved the use of an HMX-1 helicopter for the May 24 trip. However, no written procedures detailed how such flights were requested or approved. White House Military Office officials told us that the infrequency of helicopter use by the White House staff made written policies and procedures unnecessary; each request had to be considered on an individual basis. The former Deputy Director also told us that the request and approval for helicopter service for the May 24 trip, like most requests for helicopter service, were made orally. Shortly after the May 24 trip, the White House changed the approval authority for staff's use of military aircraft. According to a May 31, 1994, memorandum, the approval authority was elevated from the level of the Deputy Director of the White House Military Office to the White House Chief of Staff or the Deputy Chief of Staff. For trips that involve the Chief of Staff, the approving authority is now either the White House Counsel or the Deputy White House Counsel. Now let me turn to the issue of senior-level officials traveling on government aircraft. Approximately 500 fixed-wing airplanes and 100 helicopters are used for DOD's OSA mission, which includes transporting senior-level officials in support of command, installation, or management functions. The Secretary of Defense has designated some DOD senior-level travelers as required use travelers (1) because of their continuous requirement for secure communications, (2) for security, or (3) for responsive transportation to satisfy exceptional scheduling requirements. However, the military department secretaries may apply more stringent restrictions in determining which four-star officers within their respective departments must use these aircraft. DOD policy excludes some aircraft, such as those assigned to the Air Force 89th Military Airlift Wing, from the OSA mission. The 89th Wing provides worldwide airlift support for the President, Vice President, and other high-level officials in the U.S. and foreign governments. The Office of Management and Budget has made the General Services Administration (GSA) responsible for managing civilian agencies' aircraft programs. DOD, like the civilian agencies, is required to report data to GSA semiannually on senior-level, civilian officials' travel. DOD's policy states that the OSA inventory of fixed-wing aircraft should be based solely on wartime requirements. During our review, however, we found that each service had established its own wartime requirements based on differing definitions and methodologies. As of April 1995, the services reported 520 fixed-wing aircraft in DOD's OSA inventory. Our review showed that only 48 OSA aircraft were used in theater during the Persian Gulf War, which is less than 10 percent of the April 1995 OSA inventory. In 1994, the Air Force determined that its OSA inventory exceeded its wartime requirements, whereas the Army, Navy, and Marine Corps determined that their OSA inventories were slightly less than wartime requirements. However, a February 1993 report on Roles, Missions, and Functions issued by the Chairman of the Joint Chiefs of Staff and the May 1995 report of the Commission on Roles and Missions of the Armed Forces indicated that the existing number of aircraft dedicated to OSA missions had been and continued to be excessive. To correct this problem, we recommended in our June report that the Secretary of Defense (1) provide uniform guidance to the services concerning how to compute OSA wartime requirements, (2) develop the appropriate mechanisms to ensure the availability of each service's aircraft to help fulfill the OSA needs of the other services, and (3) reassign or otherwise dispose of excess OSA aircraft. Additionally, in our September report on the 1996 DOD operation and maintenance budget, we recommended that Congress direct the Air Force to reduce its OSA inventory to its wartime requirements, which would save $18.1 million in operation and maintenance costs. To address the recommendations in our June report, the Joint Chiefs of Staff studied OSA wartime requirements across DOD, including how the availability of each service's aircraft could help fill the needs of the other services. The resulting October 1995 report established a joint requirement for 391 OSA aircraft and developed a common methodology for determining OSA requirements. The Chairman submitted the report later in October to the Deputy Secretary of Defense, requesting his approval for the OSA fleet to be sized at 391 aircraft, which would mean a reduction of over 100 aircraft. The disposition of excess OSA aircraft is currently under review. Further, DOD plans to update its policy on OSA to formalize the definition, use, and management of OSA aircraft. Plans are also underway to assign to the Joint Chiefs of Staff responsibility for determining DOD's annual OSA requirements. Adverse publicity and increased congressional concern about potential abuses resulted in a number of statements during 1994 by the White House and the Secretary of Defense emphasizing the need for senior officials to carefully consider the use of commercial transportation instead of government aircraft. On May 9, 1995, the Deputy Secretary of Defense issued a revised policy memorandum that eliminates an entire category of "required mission use" for justifying individual OSA flights and requires that many more OSA flights be justified based on a cost comparison between DOD's OSA aircraft and commercial carriers. Our review indicated that from March 1993 to February 1995, the number of senior-level officials' OSA flights generally declined. During that period, the number of senior officials' OSA flight segments per month ranged from a high of about 1,800 in March 1993 to a low of about 1,000. We found that 16 of the 20 destinations most frequently traveled to by senior-level DOD officials were also served by commercial airlines with government contracts. For example, 1,619 flight segments from Andrews Air Force Base, Maryland, to Wright-Patterson Air Force Base, Ohio, could have been served by government-contract airlines. It should be recognized, however, that some of the trips we identified were made by those senior-level officials required to use government aircraft and that the contract flights may not have provided the same scheduling flexibility made possible by government-owned aircraft. On October 1, 1995, the Deputy Secretary of Defense issued a new policy on travel that should help decrease the potential for abuse. The new policy (1) requires the services to use the smallest and most cost-effective mission-capable aircraft available; (2) requires the Secretary of Defense's or the military department secretary's approval for use of military aircraft by required use officials for permanent change-of-station moves;(3) prohibits the scheduling of training flights strictly to accommodate senior-level officials' travel; (4) allows the military department secretaries to further restrict the required use designation for four-star officers in their respective departments; and (5) limits the use of helicopters for senior-level officials' travel. Although senior-level officials' use of helicopters in the Washington, D.C., area declined substantially between April 1994 and March 1995, these officials continued to use helicopters to travel between nearby locations. For both the Air Force and the Army, the most frequently traveled helicopter route was between Andrews Air Force Base and the Pentagon, a distance of about 15 miles. According to an Army memorandum, flying time for an Army UH-1H from Andrews Air Force Base to the Pentagon is about 24 minutes--at a cost of about $185. The same flight in an Air Force UH-1N would cost approximately $308. However, actual cost to the government would be higher because all trips are round trips. In the case of the Army, the cost to get a helicopter to the Pentagon or Andrews Air Force Base must be included, which would increase the flight time to about 1 hour and the cost to about $460. We estimate that the same trip would cost about $9 by car and about $30 by taxi. Thus, for general comparison purposes, a trip between Andrews Air Force Base and the Pentagon on either an Army or Air Force helicopter would cost over $400 more than the same trip by car. In December 1994, the Secretary of the Army established a new policy prohibiting Army officials' use of helicopter transportation between the Pentagon and Andrews Air Force Base except in unusual circumstances. The memorandum stated that the existence of unusual circumstances would be determined by the Secretary of the Army or the Chief of Staff of the Army. In our report, we recommended that the Department of Defense adopt this policy. The October 1995 revisions to DOD's policy on the use of government aircraft and air travel include a section on helicopter travel. The new policy states that "rotary wing aircraft may be used only when cost favorable as compared to ground transportation, or when the use of ground transportation would have a significant adverse impact on the ability of the senior official to effectively accomplish the purpose of the travel." We believe that this change in policy should result in fewer helicopter trips between the Pentagon and Andrews Air Force Base, as well as other nearby destinations. At the time of our June report, civilian agencies had over 1,500 aircraft that cost about $1 billion a year to operate. The civilian agency inventory includes many different types of aircraft, such as helicopters, special-purpose aircraft for fire-fighting and meteorological research, and specially configured aircraft for research and development and program support. However, only 19 are routinely used for senior-level officials' travel. These 19 aircraft cost about $24 million a year to operate. The operating costs reflect aircraft that are owned, leased, lease/purchased, and loaned between civilian agencies. For most agencies, the operating costs include those related to technical, mission-critical aircraft that are not used for administrative purposes. We also reviewed the National Aeronautics and Space Administration and Coast Guard senior officials' use of aircraft and found that, although the use of such aircraft was infrequent, when these aircraft are used, many of the destinations were served by commercial airlines with government contracts. Inspector General reports indicate that agencies were not adequately justifying the need for aircraft acquisitions and that agencies' cost comparisons with commercial service were not complete or accurate. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have. 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 the use of military helicopters and other government aircraft to transport White House staff and senior-level military and civilian officials. GAO noted that: (1) White House staff members had flown in military helicopters 14 times from January 21, 1993 to May 24, 1994 without the accompaniment of the President, Vice President, First Lady, Vice-President's wife, or Heads of State; (2) Department of Defense (DOD) policy states that the military services' operational support airlift (OSA) inventory of fixed-wing aircraft should be based strictly on wartime requirements, but DOD has not provided guidance on how the services should count their OSA aircraft or determine their wartime requirements; (3) the April 1995 OSA inventory of 520 fixed wing aircraft exceeds the Air Force's wartime requirements; (4) the military helicopters located in the Washington, D.C. area are not justified based on OSA wartime requirements; (5) the most frequent flight for DOD senior officials is to or from Andrews Air Force Base, MD; (6) in response to GAO recommendations, the Joint Chiefs of Staff has recommended a reduction in the number of OSA aircraft and DOD has strengthened the policy governing the use of OSA aircraft by senior-level travelers; and (7) only 19 of 1,500 aircraft operated by civilian agencies are used to routinely transport senior-level officials.

OPS, within the Department of Transportation's Research and Special Programs Administration (RSPA), administers the national regulatory program to ensure the safe transportation of natural gas and hazardous liquids by pipeline. The office attempts to ensure the safe operation of pipelines through regulation, national consensus standards, research, education (e.g., to prevent excavation-related damage), oversight of the industry through inspections, and enforcement when safety problems are found. The office uses a variety of enforcement tools, such as compliance orders and corrective action orders that require pipeline operators to correct safety violations, notices of amendment to remedy deficiencies in operators' procedures, administrative actions to address minor safety problems, and civil penalties. OPS is a small federal agency. In fiscal year 2003, OPS employed about 150 people, about half of whom were pipeline inspectors. Before imposing a civil penalty on a pipeline operator, OPS issues a notice of probable violation that documents the alleged violation and a notice of proposed penalty that identifies the proposed civil penalty amount. Failure by an operator to inspect a pipeline for leaks or unsafe conditions is an example of a violation that may lead to a civil penalty. OPS then allows the operator to present evidence either in writing or at an informal hearing. Attorneys from RSPA's Office of Chief Counsel preside over these hearings. Following the operator's presentation, the civil penalty may be affirmed, reduced, or withdrawn. If the hearing officer determines that a violation did occur, the Office of Chief Counsel issues a final order that requires the operator to correct the safety violation (if a correction is needed) and pay the penalty (called the "assessed penalty"). The operator has 20 days after the final order is issued to pay the penalty. The Federal Aviation Administration (FAA) collects civil penalties for OPS. From 1992 through 2002, federal law allowed OPS to assess up to $25,000 for each day a violation continued, not to exceed $500,000 for any related series of violations. In December 2002, the Pipeline Safety Improvement Act increased these amounts to $100,000 and $1 million, respectively. The effectiveness of OPS's enforcement strategy cannot be determined because OPS has not incorporated three key elements of effective program management--clear performance goals for the enforcement program, a fully defined strategy for achieving these goals, and performance measures linked to the goals that would allow an assessment of the enforcement strategy's impact on pipeline safety. OPS's enforcement strategy has undergone significant changes in the last 5 years. Before 2000, the agency emphasized partnering with the pipeline industry to improve pipeline safety rather than punishing noncompliance. In 2000, in response to concerns that its enforcement was weak and ineffective, the agency decided to institute a "tough but fair" enforcement approach and to make greater use of all its enforcement tools, including larger and more frequent civil penalties. In 2001, to further strengthen its enforcement, OPS began issuing more corrective action orders requiring operators to address safety problems that had led or could lead to pipeline accidents. In 2002, OPS created a new Enforcement Office to focus more on enforcement and help ensure consistency in enforcement decisions. However, this new office is not yet fully staffed, and key positions remain vacant. In 2002, OPS began to enforce its new integrity management and operator qualification standards in addition to its minimum safety standards. Initially, while operators were gaining experience with the new, complex integrity management standards, OPS primarily used notices of amendment, which require improvements in procedures, rather than stronger enforcement actions. Now that operators have this experience, OPS has begun to make greater use of civil penalties in enforcing these standards. OPS has also recently begun to reengineer its enforcement program. Efforts are under way to develop a new enforcement policy and guidelines, develop a streamlined process for handling enforcement cases, modernize and integrate the agency's inspection and enforcement databases, and hire additional enforcement staff. However, as I will now discuss, OPS has not put in place key elements of effective management that would allow it to determine the impact of its evolving enforcement program on pipeline safety. Although OPS has overall performance goals, it has not established specific goals for its enforcement program. According to OPS officials, the agency's enforcement program is designed to help achieve the agency's overall performance goals of (1) reducing the number of pipeline accidents by 5 percent annually and (2) reducing the amount of hazardous liquid spills by 6 percent annually. Other agency efforts--including the development of a risk-based approach to finding and addressing significant threats to pipeline safety and of education to prevent excavation-related damage to pipelines--are also designed to help achieve these goals. OPS's overall performance goals are useful because they identify the end outcomes, or ultimate results, that OPS seeks to achieve through all its efforts. However, OPS has not established performance goals that identify the intermediate outcomes, or direct results, that OPS seeks to achieve through its enforcement program. Intermediate outcomes show progress toward achieving end outcomes. For example, enforcement actions can result in improvements in pipeline operators' safety performance--an intermediate outcome that can then result in the end outcome of fewer pipeline accidents and spills. OPS is considering establishing a goal to reduce the time it takes the agency to issue final enforcement actions. While such a goal could help OPS improve the management of the enforcement program, it does not reflect the various intermediate outcomes the agency hopes to achieve through enforcement. Without clear goals for the enforcement program that specify intended intermediate outcomes, agency staff and external stakeholders may not be aware of what direct results OPS is seeking to achieve or how enforcement efforts contribute to pipeline safety. OPS has not fully defined its strategy for using enforcement to achieve its overall performance goals. According to OPS officials, the agency's increased use of civil penalties and corrective action orders reflects a major change in its enforcement strategy. However, although OPS began to implement these changes in 2000, it has not yet developed a policy that defines this new, more aggressive enforcement strategy or describes how the strategy will contribute to the achievement of the agency's performance goals. In addition, OPS does not have up-to-date, detailed internal guidelines on the use of its enforcement tools that reflect its current strategy. Furthermore, although OPS began enforcing its integrity management standards in 2002 and received greater enforcement authority under the 2002 pipeline safety act, it does not yet have guidelines in place for enforcing these standards or for implementing the new authority provided by the act. According to agency officials, OPS management communicates enforcement priorities and ensures consistency in enforcement decisions through frequent internal meetings and detailed inspection protocols and guidance. Agency officials recognize the need to develop an enforcement policy and up-to-date detailed enforcement guidelines and have been working to do so. To date, the agency has completed an initial set of enforcement guidelines for its operator qualification standards and has developed other draft guidelines. However, because of the complexity of the task, agency officials do not expect that the new enforcement policy and remaining guidelines will be finalized until sometime in 2005. The development of an enforcement policy and guidelines should help define OPS's enforcement strategy; however, it is not clear whether this effort will link OPS's enforcement strategy with intermediate outcomes, since agency officials have not established performance goals specifically for their enforcement efforts. We have reported that such a link is important. According to OPS officials, the agency currently uses three performance measures and is considering three additional measures to determine the effectiveness of its enforcement activities and other oversight efforts. (See table 1.) The three current measures provide useful information about the agency's overall efforts to improve pipeline safety, but do not clearly indicate the effectiveness of OPS's enforcement strategy because they do not measure the intermediate outcomes of enforcement actions that can contribute to pipeline safety, such as improved compliance. The three measures that OPS is considering could provide more information on the intermediate outcomes of the agency's enforcement strategy, such as the frequency of repeat violations and the number of repairs made in response to corrective action orders, as well as other aspects of program performance, such as the timeliness of enforcement actions. We have found that agencies that are successful in measuring performance strive to establish measures that demonstrate results, address important aspects of program performance, and provide useful information for decision-making. While OPS's new measures may produce better information on the performance of its enforcement program than is currently available, OPS has not adopted key practices for achieving these characteristics of successful performance measurement systems: Measures should demonstrate results (outcomes) that are directly linked to program goals. Measures of program results can be used to hold agencies accountable for the performance of their programs and can facilitate congressional oversight. If OPS does not set clear goals that identify the desired results (intermediate outcomes) of enforcement, it may not choose the most appropriate performance measures. OPS officials acknowledge the importance of developing such goals and related measures but emphasize that the diversity of pipeline operations and the complexity of OPS's regulations make this a challenging task. Measures should address important aspects of program performance and take priorities into account. An agency official told us that a key factor in choosing final measures would be the availability of supporting data. However, the most essential measures may require the development of new data. For example, OPS has developed databases that will track the status of safety issues identified in integrity management and operator qualification inspections, but it cannot centrally track the status of safety issues identified in enforcing its minimum safety standards. Agency officials told us that they are considering how to add this capability as part of an effort to modernize and integrate their inspection and enforcement databases. Measures should provide useful information for decision-making, including adjusting policies and priorities. OPS uses its current measures of enforcement performance in a number of ways, including monitoring pipeline operators' safety performance and planning inspections. While these uses are important, they are of limited help to OPS in making decisions about its enforcement strategy. OPS has acknowledged that it has not used performance measurement information in making decisions about its enforcement strategy. OPS has made progress in this area by identifying possible new measures of enforcement results (outcomes) and other aspects of program performance, such as indicators of the timeliness of enforcement actions, that may prove more useful for managing the enforcement program. In 2000, in response to criticism that its enforcement activities were weak and ineffective, OPS increased both the number and the size of the civil monetary penalties it assessed. Pipeline safety stakeholders expressed differing opinions about whether OPS's civil penalties are effective in deterring noncompliance with pipeline safety regulations. OPS assessed more civil penalties during the past 4 years under its current "tough but fair" enforcement approach than it did in the previous 5 years, when it took a more lenient enforcement approach. (See fig. 2.) From 2000 through 2003, OPS assessed 88 civil penalties (22 per year on average) compared with 70 civil penalties from 1995 through 1999 (about 14 per year on average). For the first 5 months of 2004, OPS proposed 38 civil penalties. While the recent increase in the number and the size of civil penalties may reflect OPS's new "tough but fair" enforcement approach, other factors, such as more severe violations, may be contributing to the increase as well. Overall, OPS does not use civil penalties extensively. Civil penalties represent about 14 percent (216 out of 1,530) of all enforcement actions taken over the past 10 years. OPS makes more extensive use of other types of enforcement actions that require pipeline operators to fix unsafe conditions and improve inadequate procedures, among other things. In contrast, civil penalties represent monetary sanctions for violating safety regulations but do not require safety improvements. OPS may increase its use of civil penalties as it begins to use them to a greater degree for violations of its integrity management standards. The average size of the civil penalties has increased. For example, from 1995 through 1999, the average assessed civil penalty was about $18,000. From 2000 through 2003, the average assessed civil penalty increased by 62 percent to about $29,000. Assessed penalty amounts ranged from $500 to $400,000. In some instances, OPS reduces proposed civil penalties when it issues its final order. We found that penalties were reduced 31 percent of the time during the 10-year period covered by our work (66 of 216 instances). These penalties were reduced by about 37 percent (from a total of $2.8 million to $1.7 million). The dollar difference between the proposed and the assessed penalties would be over three times as large had our analysis included the extraordinarily large penalty for the Bellingham, Washington, incident. For this case, OPS proposed a $3.05 million penalty and had assessed $250,000 as of May 2004. If we include this penalty, then over this period OPS reduced total proposed penalties by about two-thirds, from about $5.8 million to about $2 million. OPS's database does not provide summary information on why penalties are reduced. According to an OPS official, the agency reduces penalties when an operator presents evidence that the OPS inspector's finding is weak or wrong or when the pipeline's ownership changes during the period between the proposed and the assessed penalty. It was not practical for us to gather information on a large number of penalties that were reduced, but we did review several to determine the reasons for the reductions. OPS reduced one of the civil penalties we reviewed because the operator provided evidence that OPS inspectors had miscounted the number of pipeline valves that OPS said the operator had not inspected. Since the violation was not as severe as the OPS inspector had stated, OPS reduced the proposed penalty from $177,000 to $67,000. Of the 216 penalties that OPS assessed from 1994 through 2003, pipeline operators paid the full amount 93 percent of the time (200 instances) and a reduced amount 1 percent of the time (2 instances). (See fig. 3.) Fourteen penalties (6 percent) remain unpaid, totaling about $837,000 (or 18 percent of penalty amounts). In two instances, operators paid reduced amounts. We followed up on one of these assessed penalties. In this case, the operator requested that OPS reconsider the assessed civil penalty and OPS reduced it from $5,000 to $3,000 because the operator had a history of cooperation and OPS wanted to encourage future cooperation. For the 14 unpaid penalties, neither FAA's nor OPS's data show why the penalties have not been collected. We expect to present a fuller discussion of the reasons for these unpaid penalties and OPS's and FAA's management controls over the collection of penalties when we report to this and other committees next month. Although OPS has increased both the number and the size of the civil penalties it has imposed, the effect of this change on deterring noncompliance with safety regulations, if any, is not clear. The stakeholders we spoke with expressed differing views on whether the civil penalties deter noncompliance. The pipeline industry officials we contacted believed that, to a certain extent, OPS's civil penalties encourage pipeline operators to comply with pipeline safety regulations because they view all of OPS's enforcement actions as deterrents to noncompliance. However, some industry officials said that OPS's enforcement actions are not their primary motivation for safety. Instead, they said that pipeline operators are motivated to operate safely because they need to avoid any type of accident, incident, or OPS enforcement action that impedes the flow of products through the pipeline and hinders their ability to provide good service to their customers. Pipeline industry officials also said that they want to operate safely and avoid pipeline accidents because accidents generate negative publicity and may result in costly private litigation against the operator. Most of the interstate agents, representatives of their associations, and insurance company officials expressed views similar to those of the pipeline industry officials, saying that they believe civil penalties deter operators' noncompliance with regulations to a certain extent. However, a few disagreed with this point of view. For example, the state agency representatives and a local government official said that OPS's civil penalties are too small to be deterrents. Pipeline safety advocacy groups that we talked to also said that the civil penalty amounts OPS imposes are too small to have any deterrent effect on pipeline operators. As discussed earlier, for 2000 through 2003, the average assessed penalty was about $29,000. According to economic literature on deterrence, pipeline operators may be deterred if they expect a sanction, such as a civil penalty, to exceed any benefits of noncompliance. Such benefits could, in some cases, be lower operating costs. The literature also recognizes that the negative consequences of noncompliance--such as those stemming from lawsuits, bad publicity, and the value of the product lost from accidents--can deter noncompliance along with regulatory agency oversight. Thus, for example, the expected costs of a legal settlement could overshadow the lower operating costs expected from noncompliance, and noncompliance might be deterred. Mr. Chairman, this concludes my prepared statement. We expect to report more fully on these and other issues when we complete our work next month. We also anticipate making recommendations to improve OPS's ability to demonstrate the effectiveness of its enforcement strategy and to improve OPS's and FAA's management controls over the collection of civil penalties. I would be pleased to respond to any questions that you or Members of the Subcommittee might have. For information on this testimony, please contact Katherine Siggerud at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony are Jennifer Clayborne, Judy Guilliams- Tapia, Bonnie Pignatiello Leer, Gail Marnik, James Ratzenberger, and Gregory Wilmoth. 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.

Interstate pipelines carrying natural gas and hazardous liquids (such as petroleum products) are safer to the public than other modes of freight transportation. The Office of Pipeline Safety (OPS), the federal agency that administers the national regulatory program to ensure safe pipeline transportation, has been undertaking a broad range of activities to make pipeline transportation safer. However, the number of serious accidents--those involving deaths, injuries, and property damage of $50,000 or more--has not fallen. Among other things, OPS takes enforcement action against pipeline operators when safety problems are found. OPS has several enforcement tools to require the correction of safety violations. It can also assess monetary sanctions (civil penalties). This testimony is based on ongoing work for the House Committee on Transportation and Infrastructure and for other committees, as required by the Pipeline Safety Improvement Act of 2002. The testimony provides preliminary results on (1) the effectiveness of OPS's enforcement strategy and (2) OPS's assessment of civil penalties. The effectiveness of OPS's enforcement strategy cannot be determined because the agency has not incorporated three key elements of effective program management--clear program goals, a well-defined strategy for achieving goals, and performance measures that are linked to program goals. Without these key elements, the agency cannot determine whether recent and planned changes in its strategy will have the desired effects on pipeline safety. Over the past several years, OPS has focused primarily on other efforts--such as developing a new risk-based regulatory approach--that it believes will change the safety culture of the industry. But, OPS also became more aggressive in enforcing its regulations, and now plans to further strengthen the management of its enforcement program. In particular, OPS is developing an enforcement policy that will help define its enforcement strategy and has taken initial steps toward identifying new performance measures. However, OPS does not plan to finalize the policy until 2005 and has not adopted key practices for achieving successful performance measurement systems, such as linking measures to goals. Incorporation of Key Program Management Elements into OPS's Enforcement Strategy OPS increased both the number and the size of the civil penalties it assessed against pipeline operators over the last 4 years (2000-2003) following a decision to be "tough but fair" in assessing penalties. OPS assessed an average of 22 penalties per year during this period, compared with an average of 14 per year for the previous 5 years (1995-1999), a period of more lenient "partnering" with industry. In addition, the average penalty increased from $18,000 to $29,000 over the two periods. About 94 percent of the 216 penalties levied from 1994 through 2003 have been paid. The civil penalty is one of several actions OPS can take when it finds a violation, and these penalties represent about 14 percent of all enforcement actions over the past 10 years. While OPS has increased the number and the size of its civil penalties, stakeholders--including industry, state, and insurance company officials and public advocacy groups--expressed differing views on whether these penalties deter noncompliance with safety regulations. Some, such as pipeline operators, thought that any penalty was a deterrent if it kept the pipeline operator in the public eye, while others, such as safety advocates, told us that the penalties were too small to be effective sanctions.

DOE is responsible for a diverse set of missions, including nuclear security, energy research, and environmental cleanup. These missions are managed by various organizations within DOE and largely carried out by contractors at DOE sites. According to federal budget data, NNSA is the largest organization in DOE, overseeing nuclear weapons, nuclear nonproliferation, and naval reactors missions at its sites. With a $10.5 billion budget in fiscal year 2011--nearly 40 percent of DOE's total budget--NNSA is responsible for, among other things, providing the United States with safe, secure, and reliable nuclear weapons in the absence of underground nuclear testing and maintaining core competencies in nuclear weapons science, technology, and engineering. Ensuring that the nuclear weapons stockpile remains safe and reliable in the absence of underground nuclear testing is extraordinarily complicated and requires state-of-the-art experimental and computing facilities, as well as the skills of top scientists in the field. Over the past decade, the United States has invested billions of dollars in sustaining the cold war-era stockpile and upgrading the laboratories and, in 2011, the administration announced plans to request $88 billion from Congress over the next decade to operate and modernize the nuclear security enterprise and ensure that base scientific, technical, and engineering capabilities are sufficiently supported, and the nuclear deterrent in the United States can continue to be safe, secure, and reliable. Under DOE's long-standing model of having unique management and operating (M&O) contractors at each site, management of its sites has historically been decentralized and, thus, fragmented. Since the Manhattan Project produced the first atomic bomb during World War II, NNSA, DOE, and their predecessor agencies have depended on the expertise of private firms, universities, and others to carry out research and development work and efficiently operate the facilities necessary for the nation's nuclear defense. DOE's relationship with these entities has been formalized over the years through its M&O contracts--agreements that give DOE's contractors unique responsibility to carry out major portions of DOE's missions and apply their scientific, technical, and management expertise. Currently, DOE spends 90 percent of its annual budget on M&O contracts, making it the largest non-Department of Defense contracting agency in the government. The M&O contractors at DOE's NNSA sites have operated under DOE's direction and oversight but largely independently of one another. Various headquarters and field-based organizations within DOE and NNSA develop policies, and NNSA site offices, collocated with NNSA's sites, conduct day-to-day oversight of the M&O contractors and evaluate the contractors' performance in carrying out the sites' missions. NNSA focused considerable attention on reorganizing its internal operations; however, it and DOE have struggled with establishing how NNSA should operate as a separately organized agency within the department. Several factors contributed to this situation. First, DOE and NNSA did not have a useful model to follow for establishing a separately organized agency in DOE. The President's Foreign Intelligence Advisory Board's June 1999 report suggested several federal agencies, such as the National Oceanic and Atmospheric Administration in the Department of Commerce, which could be used as a model for NNSA. However, as we reported in January 2007, none of the agency officials we interviewed considered their agency to be separately organized or believed that their agency's operational methods were transferable to NNSA. Second, DOE's January 2000 implementation plan, which was required by the NNSA Act, did not define how NNSA would operate as a separately organized agency within DOE. Instead, reflecting the opposition of the then DOE senior leadership to the creation of NNSA, the implementation plan "dual-hatted" virtually every significant statutory position in NNSA with DOE officials (i.e., having DOE officials contemporaneously serve in NNSA and DOE positions), including the Director of NNSA's Office of Defense Nuclear Counterintelligence and General Counsel. As we testified in April 2001, this practice caused considerable concern about NNSA's ability to function with the independence envisioned in the NNSA Act. Dual-hatting was subsequently forbidden by an amendment to the NNSA Act. A lack of formal agreement between DOE and NNSA in a number of key areas--budgeting, procurement, information technology, management and administration, and safeguards and security--resulted in organizational conflicts that inhibited effective operations. Even where formal procedures were developed, interpersonal disagreements hindered effective cooperation. For example, our January 2007 report described the conflict between NNSA and DOE counterintelligence offices. Specifically, NNSA and DOE counterintelligence officials disagreed over (1) the scope and direction of the counterintelligence program, (2) their ability to jointly direct staff in the headquarters counterintelligence program offices, (3) the allocation of counterintelligence resources, (4) counterintelligence policy making and (5) their roles and responsibilities in handling specific counterintelligence matters. Subsequently, Congress amended the NNSA Act to consolidate the counterintelligence programs of DOE and NNSA under the Department of Energy. The Defense Science Board provides the Department of Defense with independent advice and recommendations on matters relating to the department's scientific and technical enterprise See Defense Science Board Task Force, Nuclear Capabilities (Washington, D.C.: December 2006). organized status, maintains a costly set of distinctly separate overhead and indirect cost operations that often duplicate existing DOE functions. For example, NNSA retains separate functions in areas such as, among others, congressional affairs, general counsel, human resources, procurement and acquisition, and public affairs. According to this November 2011 report, these redundant operations are costly and can complicate communications and program execution. There have been continuing calls for removing NNSA from DOE and establishing it as a separate agency. We reported in January 2007 that former senior DOE and NNSA officials with whom we spoke generally did not favor removing NNSA from DOE; we concluded that such drastic change was unnecessary to produce an effective organization. Since its creation, NNSA has made considerable progress resolving some of its long-standing management deficiencies. For example, we reported in June 2004 that NNSA had better delineated lines of authority and improved communication between NNSA headquarters and its site offices. Furthermore, our January 2007 report contained 21 recommendations to the Secretary of Energy and the Administrator of NNSA that were intended to correct deficiencies in five areas-- organization, security, project management, program management, and financial management. DOE and NNSA have taken important steps to address most of these recommendations. For example, to improve security, we recommended that the Administrator of NNSA, among other things, implement a professional development program for security staff to ensure the completion of needed training, develop a framework to evaluate results from security reviews and guide security improvements, and establish formal mechanisms for sharing and implementing lessons learned across the weapons complex. NNSA's establishment of an effective headquarters security organization has made significant progress implementing these recommendations by performing security reviews, developing security performance measures, and instituting a security lessons-learned center. Nevertheless, NNSA continues to experience significant deficiencies, particularly in its management of major projects and contracts. As we testified in February 2012, a basic tenet of effective management is the ability to complete projects on time and within budget. However, for more than a decade, NNSA has continued to experience significant cost and schedule overruns on its major projects, principally because of ineffective oversight and poor contractor management. We have reported that NNSA's efforts to extend the operational lives of nuclear weapons in the stockpile have experienced cost increases and schedule delays, such as a $300 million cost increase and 2-year delay in the refurbishment of the W87 nuclear warhead and a $70 million cost increase and 1-year delay in the refurbishment of the W76 nuclear warhead. Furthermore, we reported that the estimated cost to construct a modern Uranium Processing Facility at NNSA's Y-12 National Security Complex experienced a nearly sevenfold cost increase from between $600 million and $1.1 billion in 2004 to between $4.2 billion and $6.5 billion in 2011. We also reported in March 2012 that NNSA's project to construct a new plutonium research facility at Los Alamos National Laboratory--the Chemistry and Metallurgy Research Replacement Nuclear Facility-- would cost between $3.7 billion and $5.8 billion--nearly a sixfold increase from NNSA's original estimate. NNSA's February 2012 decision to defer construction of this facility for at least 5 years will result in a total delay of between 8 and 12 years from its original plans. NNSA's planning, programming, and budgeting process has also experienced a setback, which raises questions about the process's capability and flexibility. Specifically, NNSA's modernization and operations plans are detailed and annually updated in the agency's Stockpile Stewardship and Management Plan (SSMP), which provides details of nuclear security enterprise modernization and operations plans over the next two decades. In addition, as discussed above, the NNSA Act requires NNSA to annually submit to Congress an FYNSP--a budget document approved by the Office of Management and Budget that details NNSA's planned expenditures for the next 5 years. Furthermore, Section 1043 of the National Defense Authorization Act for Fiscal Year 2012 requires the Department of Defense and NNSA to jointly produce an annual report that, among other things, provides a detailed 10-year estimate of modernization budget requirements. NNSA neither submitted an FYNSP based on "programmatic requirements" nor the Section 1043 annual report with its fiscal year 2013 budget submission. In addition, NNSA has yet to release an updated SSMP. According to the Secretary of Energy, the August 2011 Budget Control Act created "new fiscal realities" that have caused the agency to revise its long-range modernization and operations plans and budget. An NNSA official told us that the revised plans, which will include the FYNSP, Section 1043 annual report, and updated SSMP should be completed in July 2012. We are currently reviewing NNSA's planning, programming, and budgeting process in response to a request from the Subcommittee on Energy and Water Development, Senate Committee on Appropriations, and we expect to issue a report on this work in the next few months. In conclusion, producing a well-organized and effective agency out of what was widely considered a dysfunctional enterprise has been a considerable challenge. In some areas, NNSA can be viewed as a success. In particular, NNSA has successfully ensured that the nuclear weapons stockpile remains safe and reliable in the absence of underground nuclear testing, accomplishing this complicated task by using state-of-the-art facilities, as well as the skills of top scientists. As we testified in February 2012, maintaining government-owned facilities that were constructed more than 50 years ago and ensuring M&O contractors are sustaining critical human capital skills that are highly technical in nature and limited in supply are both difficult undertakings. Careful federal oversight over the tens of billions of dollars NNSA proposes to spend to modernize nuclear facilities will be necessary to ensure these funds are spent in as an effective and efficient manner as possible, especially given NNSA's record of weak management of its major projects. Over the past decade, we have made numerous recommendations to DOE and NNSA to improve their management and oversight practices. DOE and NNSA have acted on many of these recommendations and have made considerable progress. Nevertheless, enough significant management problems remain that prompt some to call for removing NNSA from DOE and either moving it to another department or establishing it as a separate agency. As we concluded in January 2007, however, we do not believe that such drastic changes are necessary, and we continue to hold this view today. Importantly, we are uncertain whether such significant organizational changes to increase NNSA's independence would produce the desired effect of creating a modern, responsive, effective, and efficient nuclear security enterprise. In light of the substantial leadership commitment to reform made by senior DOE and NNSA officials, and the significant improvements that have already been made, we believe that NNSA remains capable of delivering the management improvements necessary to be an effective organization, and we will continue to monitor NNSA's progress making these improvements. Chairman Turner, Ranking Member Sanchez, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you may have at this time. If you or your staff members have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. GAO staff who made key contributions to this testimony are Allison Bawden, Ryan T. Coles, Jonathan Gill, and Kiki Theodoropoulos, Assistant Directors, and Patrick Bernard, Senior 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.

During the late 1990s, DOE had difficulties with a lack of clear management authority and responsibility that contributed to security problems at the nation's nuclear weapons laboratories and management problems with major projects. In response, Congress created NNSA as a separately organized agency within DOE under the NNSA Act. NNSA is responsible for managing nuclear weapon- and nonproliferation-related national security activities in laboratories and other facilities, collectively known as the nuclear security enterprise. GAO continues to identify problems across the nuclear security enterprise, from projects' cost and schedule overruns to inadequate oversight of safety and security at NNSA's sites. With NNSA proposing to spend tens of billions of dollars to modernize its facilities, it is important to ensure scarce resources are spent in an effective and efficient manner. This testimony addresses (1) NNSA's early experiences organizing and operating as a separately organized agency within DOE and (2) NNSA's efforts to correct long-standing management deficiencies. It is based on prior GAO reports issued from January 1995 to March 2012. DOE and NNSA continue to act on the numerous recommendations GAO has made to improve NNSA's management. GAO will continue to monitor DOE's and NNSA's implementation of these recommendations. After the enactment of Title 32 of the National Defense Authorization Act for Fiscal Year 2000 (NNSA Act), the Department of Energy (DOE) and the National Nuclear Security Administration (NNSA) struggled to determine how NNSA should operate as a separately organized agency within the department. A number of factors contributed to this. First, DOE and NNSA did not have a useful model to follow for establishing a separately organized agency in DOE. Several federal agencies were suggested as models, such as the National Oceanic and Atmospheric Administration in the Department of Commerce. However, GAO reported in January 2007 that agency officials GAO interviewed did not consider their agency to be separately organized or believed that their agency's operational methods were transferable to NNSA. Second, DOE's January 2000 plan to implement the NNSA Act did not define how NNSA would operate as a separately organized agency within DOE. Internal DOE opposition to the creation of NNSA led the department to fill virtually every significant statutory position in NNSA with DOE officials (i.e., having DOE officials contemporaneously serve in NNSA and DOE positions). As GAO testified in April 2001, this practice of "dual-hatting" caused considerable concern about NNSA's ability to independently function. Also, lack of formal agreement between DOE and NNSA in a number of key areas such as, among others, budgeting and procurement, led to organizational conflicts that inhibited effective operations. Even where formal procedures were developed, interpersonal disagreements hindered effective cooperation. For example, a January 2007 GAO report described the conflict between NNSA and DOE counterintelligence offices, which led to Congress subsequently amending the NNSA Act to consolidate the counterintelligence programs of DOE and NNSA under DOE. NNSA has made considerable progress resolving some of its long-standing management deficiencies, but significant improvement is still needed especially in NNSA's management of its major projects and contracts. GAO reported in June 2004 that NNSA has better delineated lines of authority and has improved communication between its headquarters and site offices. In addition, NNSA's establishment of an effective headquarters security organization has made significant progress resolving many of the security weaknesses GAO has identified. Nevertheless, NNSA continues to experience major cost and schedule overruns on its projects, such as research and production facilities and nuclear weapons refurbishments, principally because of ineffective oversight and poor contractor management. In some areas, NNSA can be viewed as a success. Importantly, NNSA has continued to ensure that the nuclear weapons stockpile remains safe and reliable in the absence of underground nuclear testing. At the same time, NNSA's struggles in defining itself as a separately organized agency within DOE, and the considerable management problems that remain have led to calls in Congress and other organizations to increase NNSA's independence from DOE. However, senior DOE and NNSA officials have committed to continuing reform, and DOE's and NNSA's efforts have led to some management improvements. As a result, GAO continues to believe, as it concluded in its January 2007 report, that drastic organizational change to increase independence is unnecessary and questions whether such change would solve the agency's remaining management problems.

This section describes nuclear fuel production and uranium enrichment, DOE's and USEC's involvement in uranium enrichment, and cleanup of uranium enrichment plants. Uranium enrichment is the process of raising the concentration of uranium-235, which is the isotope of uranium that undergoes fission to release enormous amounts of energy. Uranium is categorized by its concentration of uranium-235, expressed as a percentage of weight or "assay" level. DOE categorizes uranium in five general types, each of which is characterized by a different assay level and has different uses (see table 1). Uranium undergoes a number of processing steps to produce LEU nuclear fuel, beginning with the mining of uranium ore and ending with the fabrication of LEU fuel for nuclear reactors (see fig. 1). The uranium enrichment stage falls approximately in the middle of the nuclear fuel cycle. As can be seen in figure 1, the enrichment process results in two principal products: (1) enriched uranium hexafluoride and (2) leftover "tails" of uranium hexafluoride. These tails are also known as depleted uranium because the material is depleted in uranium-235 compared with natural uranium. Tails are generally considered an environmental liability. The Nuclear Regulatory Commission (NRC) requires uranium enrichment facility operators to provide financial assurance that funds will be available when needed for the disposition of depleted uranium. To meet these NRC requirements, USEC has used surety bonds--which guarantee payment for the tails disposition costs by a third party, among other things, in the event that USEC defaults on such obligations--to guarantee the disposition of its depleted uranium and stored wastes. LEU resulting from the enrichment process is valued based on two components: (1) the value of the feed component, which is generally natural uranium in the form of uranium hexafluoride, and (2) the value of the enrichment component, or separative work units (SWU), which is the industry standard for the measure of effort needed to transform a given amount of natural uranium into LEU. According to DOE, the United States needs an assured source of tritium to maintain the U.S. nuclear weapons stockpile. In October 2014, we reported on DOE's practice of using only unobligated LEU to meet national security needs for tritium. To produce tritium, DOE has stated that it can only use unobligated LEU. LEU is considered to be unobligated when neither the uranium nor the technology used to enrich it carries an "obligation" from a foreign country regarding its use, such as a requirement that the material only be used for peaceful purposes. These obligations are contained in international agreements to which the United States is a party. In the 1940s, DOE and its predecessor agencies began operating government-owned uranium enrichment plants first to meet national security needs for enriched uranium and later for use as fuel in commercial nuclear reactors. In 1992, United States Enrichment Corporation was established as a government corporation to, among other things, provide uranium enrichment services for the U.S. government and utilities that operate nuclear power plants and to take over operations of DOE's two GDPs in Portsmouth, Ohio, and Paducah, Kentucky. Then, in 1996, the USEC Privatization Act authorized the government corporation's sale to the private sector. Two years later, the government corporation was privatized through an initial public offering on July 28, 1998, which resulted in proceeds to the U.S. government of nearly $1.9 billion. Through privatization, United States Enrichment Corporation became a subsidiary of the new private company USEC Inc. USEC Inc. then changed its name to Centrus Energy Corp after it emerged from bankruptcy in September 2014. Today, United States Enrichment Corporation continues to be a subsidiary of Centrus. The Energy Policy Act of 1992 required the President to transfer to United States Enrichment Corporation, at its request, any intellectual and physical property related to a type of next-generation uranium enrichment technology called atomic vapor laser isotope separation (AVLIS). In 1973, Lawrence Livermore National Laboratory began conducting research on AVLIS--a technology that uses laser light to separate from natural uranium the specific uranium atoms needed to sustain nuclear reactions. Prior to transferring the technology to United States Enrichment Corporation in 1995 for further research and development and for eventual commercialization, DOE spent more than $1.7 billion developing the technology, which, according to USEC, was expected to use significantly less electricity than gaseous diffusion technology. In June 1999, USEC announced that it was suspending further development on AVLIS technology--on which it had spent over $100 million since the company was privatized--and would instead focus on developing other commercially viable enrichment technologies. According to USEC's 1999 Annual Report, USEC determined that the returns from AVLIS would not be sufficient to outweigh the risks and costs of further development, and centrifuge technology was a well-established enrichment process. In 2002, DOE and USEC signed an agreement that committed USEC to pursue the development of gas centrifuge technology. This technology, which is now known as American Centrifuge, is based on gas centrifuge technology originally developed by DOE from the 1960s to the 1980s, after which DOE suspended development, in part due to budget constraints. According to USEC documents, the American Centrifuge technology would be significantly less energy intensive and more cost- efficient than the gaseous diffusion process used in the Portsmouth and Paducah GDPs. Subsequently, in 2004, USEC announced its selection of the Portsmouth plant as the future home of the American Centrifuge Plant--the facility where the American Centrifuge technology would be deployed--and received a license to operate the plant from NRC in 2007. DOE and USEC signed a cooperative agreement in 2012 to share the cost of supporting a research, development, and demonstration program for the American Centrifuge technology. According to USEC, the program ended in April 2014 and achieved all of its technical milestones on time and within budget. In May 2014, USEC and UT-Battelle--the management and operating contractor of DOE's Oak Ridge National Laboratory--signed an agreement to maintain the capability of the American Centrifuge technology. In accordance with the USEC Privatization Act, the government is responsible for all costs incurred by the uranium enrichment program before July 1, 1993, when United States Enrichment Corporation began operating the two GDPs. Due to decreased demand for enrichment services and high costs of operating the GDPs, USEC ceased enrichment operations at the Portsmouth GDP in 2001 and at the Paducah GDP in 2013. These plants, as well as the Oak Ridge GDP (now known as the East Tennessee Technology Park), which was never operated by USEC, are contaminated with hazardous industrial, chemical, nuclear, and radiological materials. Cleanup activities, known as decontamination and decommissioning, include assessing and treating groundwater or soil contamination, disposing of contaminated materials, and making general repairs to keep the plants in a safe condition until they can be fully demolished. According to DOE's 2010 Uranium Enrichment Decontamination and Decommissioning Report, the decontamination and decommissioning of the GDPs will cost billions of dollars and span several decades. DOE is decontaminating and decommissioning the three GDPs in the following phased approach: Oak Ridge GDP: DOE began decontaminating and decommissioning its Oak Ridge GDP in 1994 and estimates that it will be completed in 2024. Portsmouth GDP: DOE began decontaminating and decommissioning its Portsmouth GDP in 2009, announcing that it had contracted with USEC for accelerated environmental cleanup work to prepare the facility for decontamination and decommissioning. In August 2010, DOE entered into a new contract with another contractor (Fluor-B&W Portsmouth LLC) to decontaminate and decommission the former facilities at Portsmouth. According to a March 2014 DOE Office of Inspector General report, the decontamination and decommissioning work at the Portsmouth GDP is currently estimated to extend until 2044. Paducah GDP: DOE has not yet started decontaminating and decommissioning its Paducah GDP. After ceasing enrichment activities in May 2013, Centrus returned full control of the Paducah GDP to DOE in late October 2014. In July 2014, DOE contracted with Fluor Federal Services, Inc., to conduct activities to prepare the facility for eventual decontamination and decommissioning. According to a March 2014 DOE Office of Inspector General report, the decontamination and decommissioning work at the Paducah GDP is currently estimated to extend until 2044. However, according to DOE officials, the department is currently evaluating the projected lifecycle cost and schedule estimates for the Paducah cleanup completion. Since USEC was privatized in 1998 through June 1, 2015, DOE and USEC have engaged in 23 transactions (see app. II for a detailed description of the 23 transactions). Based on our analysis of documents and interviews with DOE officials, we grouped these transactions into the following six broad categories: Establishment of USEC. DOE and USEC engaged in 3 transactions to help establish the company as a private company. For example, DOE transferred enriched uranium to USEC, as required by the USEC Privatization Act, from 1998 to 2003. These transfers established value for USEC in the marketplace. In addition, beginning in 1998, DOE agreed to provide employment transition services to USEC for employees affected by restructuring activities that occurred at the Portsmouth and Paducah GDPs as a result of USEC's privatization. National security. DOE and USEC engaged in 6 transactions for national security purposes. Specifically, DOE engaged in one transaction in 2012 to secure unobligated LEU from USEC to meet national security needs for the production of tritium for up to 18 months, and DOE engaged in a second transaction later in 2012 to secure unobligated LEU from USEC to meet national security needs for the production of tritium for up to 15 years. The other 4 transactions in this category supported the research and development of the American Centrifuge technology to meet long-term national security needs for unobligated LEU, such as for tritium production. For example, in 2010, DOE and USEC signed a cooperative agreement to share the cost of USEC's development and demonstration of the American Centrifuge technology for a year. To provide its share of the cost, DOE took title to and financial responsibility for the disposal of depleted uranium tails from USEC. Facilities management. DOE and USEC engaged in 5 transactions regarding the operation and management of various facilities, including the Portsmouth and Paducah GDPs, as well as other facilities associated with the development of the American Centrifuge technology. For example, in one transaction, DOE signed a lease agreement with United States Enrichment Corporation in 1993--when it became a government corporation--and the lease was transferred to the private corporation when the company was privatized. The agreement included USEC's lease of the Portsmouth and Paducah GDPs, as well as an electric power agreement and an agreement between DOE and USEC to provide certain services for each other related to the use of the GDPs. In another transaction, after USEC ceased enrichment activities at the Portsmouth GDP, DOE contracted with USEC from 2001 through 2011 for several activities associated with maintaining the facility in a dormant condition and preparing the facility for decontamination and decommissioning. Nuclear materials management and security. DOE and USEC engaged in 3 transactions to support the management and security of nuclear materials. In one transaction beginning in 1999, DOE agreed to pay USEC to provide safeguards and security services for HEU that DOE stored at the Portsmouth GDP. In another transaction beginning in 1999, USEC contracted with DOE for the storage of enriched uranium that exceeded the amount of material USEC could possess in its facilities under NRC limits. In the third transaction, from 2005 through 2008, DOE contracted with a USEC subsidiary to manage the U.S. government's nuclear materials tracking system, called the Nuclear Materials Management and Safeguards System. Issues from prior transactions. DOE and USEC engaged in 3 transactions to address issues with previous transfers of uranium when DOE had inadvertently provided USEC with uranium that did not conform to industry standards or more uranium than originally agreed on by the parties. For example, in March 2000, USEC discovered that uranium that it had received from DOE prior to privatization was contaminated with technetium, a radioactive metal that is considered a contaminant by commercial specifications for nuclear fuel. In a 7- year transaction that began in 2002, DOE (1) contracted with USEC to clean up some of the contaminated uranium, (2) provided replacement uranium and monetary payment to USEC, and (3) took title to some of USEC's depleted uranium. In a second transaction, in 2003, DOE transferred HEU to USEC to replace other material that DOE transferred to USEC prior to privatization that did not conform to industry standards. In a third transaction, DOE and USEC addressed the fact that they had underestimated the amount of material stored in certain HEU cylinders that DOE had transferred to USEC prior to privatization. Specifically, DOE had transferred to USEC about 0.8 metric tons of HEU more than initially agreed on. To address this issue, in 1998, USEC agreed to pay DOE about $35 million more than originally agreed on by the parties. Other. DOE and USEC engaged in 3 other transactions since 1998. One transaction--which occurred from 2005 through 2006 and involved DOE, USEC, and a third party--was intended to determine the feasibility and benefits of re-enriching a portion of DOE's depleted uranium inventory for potential use as nuclear fuel in a commercial reactor. In the other two transactions, USEC and its subsidiaries paid a fee for access to DOE restricted data related to the centrifuge technology. Access to this data allowed USEC to utilize DOE centrifuge technology in the development and design of the American Centrifuge technology. See appendix III for a table of the 23 transactions organized by category. Figure 2 shows how the transactions were distributed over the 17-year period that we reviewed. Our analysis shows that the general nature of the transactions evolved over time. Immediately following USEC's privatization, the majority of the transactions were of the establishment of USEC category. In the middle part of the 17-year period, most of the transactions were of the facilities management and nuclear materials management and security categories. In recent years, the majority of the transactions were of the national security category. DOE and USEC have been continuously involved in transactions since 1998. Of the 23 transactions, at least 6 have spanned a decade or longer, while the other transactions were of shorter duration. In addition to the transactions described above, there were at least three other significant arrangements involving DOE and USEC, which were noteworthy because, in each case, DOE or USEC received something of value as part of the arrangement, even though the arrangement did not meet our definition of a transaction. These arrangements were as follows: Before it was privatized, the U.S. government selected United States Enrichment Corporation as the U.S. government's executive agent for the HEU Purchase Agreement--a 1993 nuclear arms reduction agreement between the United States and Russia. USEC continued its role as sole executive agent after its privatization, and activities under the agreement continued through 2013. Under the agreement, United States Enrichment Corporation, and later USEC, purchased LEU from the Russian government's executive agent, which had produced it by downblending HEU taken from dismantled Soviet-era nuclear warheads. Centrus officials told us that USEC used its large backlog of contracts with commercial utilities to place the LEU in the market. According to Centrus officials, this agreement provided a significant source of supply of LEU to USEC over a 20-year period and resulted in the destruction of the equivalent of 20,000 nuclear warheads. We did not identify any exchange of funds between DOE and USEC related to USEC's service as the executive agent. In a December 2006 agreement, DOE granted USEC a nonexclusive patent license for the use or manufacture of the American Centrifuge technology. In this 2006 agreement, USEC agreed to pay DOE a royalty for the use of the American Centrifuge technology. According to DOE and Centrus officials, DOE has never received royalties from USEC or Centrus under this license. According to Centrus officials, the company has not made any payments because it has not yet commercialized the American Centrifuge Plant or sold any material produced by the centrifuge technology. In 2012, USEC granted to DOE (1) an irrevocable, nonexclusive, royalty-free license, for use by or on behalf of the United States, in all centrifuge intellectual property for government purposes and (2) an irrevocable, nonexclusive license in all centrifuge intellectual property, with the right to sublicense to other parties, for commercial purposes. This arrangement was made at a time when there was uncertainty surrounding the future of the American Centrifuge technology. According to Centrus officials, USEC has transferred title to DOE for more than 30 existing centrifuges, built at USEC's expense, as well as all new machines built during the research, development, and demonstration program. DOE identified various monetary and nonmonetary costs and benefits of the 23 transactions. For most transactions that occurred since 2005, DOE officials provided us with information through documents and interviews about the costs and benefits of each transaction. However, for transactions occurring prior to 2005, DOE officials were not always able to provide definitive information about the costs and benefits of the transactions independent of that which was stated in the transactional documents. For transactions occurring after 2005--which mostly fell into the national security category--the costs DOE identified were incurred through the transfer of appropriated funds to USEC, transfer of various types of uranium, and acceptance of responsibility for the future disposition of depleted uranium tails. The benefits DOE identified were both monetary (i.e., payments or a reduction in obligations for the disposal of depleted uranium) and nonmonetary (e.g., LEU, national security benefits such as the development of the American Centrifuge technology). For transactions prior to 2005, DOE officials were not always able to provide definitive information on the costs and benefits to DOE independent of that which was stated in the transactional documents. In some cases, for example, DOE officials told us that key officials familiar with the transactions had since retired or were deceased, and therefore information on the costs and benefits of these transactions was not available. In addition, DOE officials told us that the department changed accounting systems in 2004, and therefore the officials could not always access definitive cost and benefit information prior to 2005. For example, DOE officials provided us with information on USEC's payments to DOE for the lease of the Portsmouth and Paducah GDPs from 2005 to 2014, but they could not provide us with information on USEC's payments prior to 2005. We provided a draft of this report for comment to the Secretary of Energy on July 29, 2015. DOE provided technical comments that were incorporated, as appropriate. We also provided a technical statement of facts to Centrus Energy Corp. We received technical comments from Centrus and incorporated them, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Energy, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. The objectives of our review were to (1) identify transactions involving the Department of Energy (DOE) and USEC Inc. (USEC, now known as Centrus Energy Corp.) since USEC was privatized in 1998 and (2) describe the costs and benefits, if any, of these transactions to DOE, as identified by DOE. For the purpose of our review, we define a transaction as a contract or agreement providing for an exchange of funds, uranium of any type, or services between or involving DOE and USEC. We included in our scope any transactions that occurred between USEC's privatization on July 28, 1998, and present (July 1, 2015), as well as transactions that commenced before July 28, 1998, but that continued to be executed after USEC was privatized. We excluded interactions involving DOE and USEC if no exchange of monetary payment, uranium, or services occurred. To conduct this work, we reviewed and analyzed documents identifying these transactions and collected information regarding the type, purpose, costs, and benefits of the transactions. These documents include annual DOE budget justification materials for fiscal years 1999 through 2016, USEC/Centrus Energy Corp.'s annual reports and corporate filings with the U.S. Securities and Exchange Commission from 1998 through 2015, contracts and agreements between DOE and USEC, and prior GAO reports. Once we identified a preliminary list of transactions involving DOE and USEC, we asked DOE to review the list. DOE officials amended the list and provided documentation for additional transactions to include. Based on our analysis of DOE documents, and through interviews with DOE officials, we added and consolidated certain transactions and removed others that were inconsistent with our definition of a transaction. We ultimately developed a final list of 23 transactions. We also interviewed Centrus Energy Corp. officials and provided an opportunity to review and confirm the final list of transactions to ensure that the list was comprehensive and accurate, and they concurred with the list. We then provided DOE with a standard set of questions regarding the purpose, costs, and benefits of each of the transactions in the list. In two cases, DOE was able to fully complete the standard set of questions. For the other transactions, DOE officials told us that documentation was not fully available to answer the standard question sets for reasons we discuss in the report. Instead, we conducted interviews with DOE officials to collect information that they did know about each transaction, and we reviewed available DOE and USEC documentation to obtain additional information on the costs and benefits of each transaction. See appendix IV for an example of the standard set of questions we provided to DOE officials on each transaction. For the purpose of this review, in cases where data were available, we are reporting DOE-identified costs and benefits of each transaction. To assess the reliability of the costs and benefits that DOE identified for each transaction, we reviewed documents to corroborate DOE-identified costs and benefits. Such documents included contracts, memorandums of agreement, lease agreements, and summary information from DOE/NRC Form 741. Based on these steps, we determined that the information we are reporting on DOE-identified costs and benefits is sufficiently reliable for the purposes of this review. We conducted this performance audit from November 2014 to September 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Energy Policy Act of 1992 directed the newly created United States Enrichment Corporation to lease DOE's two gaseous diffusion plants (GDP) in Ohio and Kentucky. On July 1, 1993, DOE and United States Enrichment Corporation entered into an initial 6-year lease for the GDPs. When USEC was privatized in 1998, the lease was transferred to the private corporation and eventually renewed through July 1, 2016. However, USEC returned both GDPs to DOE prior to 2016. Portsmouth GDP: On December 23, 2010, USEC notified DOE of its intent to return the leased areas of the Portsmouth GDP to DOE. After ceasing uranium enrichment operations in 2001, USEC maintained the Portsmouth plant in cold standby at DOE's request and subsequently cold shutdown status until 2011. Paducah GDP: On August 1, 2013, USEC notified DOE of its intent to return the leased areas of the Paducah GDP to DOE on October 21, 2014. DOE and USEC were involved in a 10-year transaction related to the closure of the Portsmouth GDP. Activities related to the closure were performed under one contract and represented two phases at the Portsmouth GDP: (1) cold standby and (2) cold shutdown. Cold standby: In June 2000, USEC announced its decision to cease uranium enrichment operations at the Portsmouth GDP in June 2001. On March 1, 2001, the Secretary of Energy announced that DOE would place the Portsmouth GDP in cold standby mode--a dormant condition that would allow operations to be resumed within 18 to 24 months if needed. In August 2001, DOE and USEC signed an agreement for USEC to provide certain services, including those necessary for maintaining the GDP in cold standby mode. Specifically, beginning in 2001, USEC provided a number of services for DOE related to cold standby, including winterization and removal of deposits of uranium hexafluoride from equipment. Cold shutdown: In 2006, DOE and USEC modified the Portsmouth GDP cold standby contract to begin transitioning the GDP to cold shutdown mode. Cold shutdown mode involved work to maintain and prepare the GDP for eventual decontamination and decommissioning. Under this transaction, which spanned 7 years, DOE and USEC contracted for USEC to clean up contaminated uranium; in exchange, DOE provided replacement uranium and payments to USEC and also took title to some of USEC's depleted uranium. Specifically, in early 2001, USEC notified DOE that up to 9,550 metric tons of about 45,000 metric tons of natural uranium that it had received from DOE prior to privatization was contaminated with technetium--a radioactive metal that is produced as a by-product of fission in a nuclear reactor--at levels exceeding the commercial specification for nuclear fuel. After USEC notified DOE of its contaminated uranium, DOE determined that about 5,517 metric tons of uranium in DOE's inventory was also contaminated with technetium. According to USEC, replacing the 9,550 metric tons of contaminated uranium would have cost USEC approximately $238 million in 2001. USEC requested that DOE replace USEC's contaminated uranium with clean uranium from DOE's inventory. DOE did not admit legal liability for compensating USEC for the contaminated uranium. In addition, according to DOE officials, DOE did not have enough available clean uranium in its excess uranium inventory to replace all of USEC's contaminated uranium. However, starting in 2002, DOE and USEC signed a series of agreements to decontaminate or replace USEC's contaminated inventory (see fig. 3 for a summary of the uranium decontamination process). In June 2002, DOE and USEC agreed that, among other things, USEC would process some of the contaminated uranium at the Portsmouth plant for 15 months to remove the technetium. USEC would initially pay about half of the costs associated with decontamination, and DOE would compensate USEC by taking title to some of USEC's depleted uranium, reducing USEC's costs for eventual disposal of this material. As part of the June 2002 agreement, USEC agreed to formally release DOE from any potential claims of liability as USEC decontaminated the uranium. USEC decontaminated about 2,900 metric tons of uranium under this agreement. DOE and USEC signed two subsequent agreements in September and November 2003 that extended USEC's decontamination work through December 2003. In 2004, DOE and USEC signed additional agreements for USEC to decontaminate uranium. Specifically, under an April 2004 work authorization, DOE paid USEC using appropriated funds for decontamination work conducted from December 2003 to December 2004. USEC decontaminated about 2,050 metric tons during this time. In October 2004, DOE replaced 2,116 metric tons of USEC's contaminated uranium with the same amount of uncontaminated uranium. Two months later, in December 2004, USEC agreed to decontaminate an additional amount of contaminated uranium. In June 2006, we reported that DOE had provided USEC about 1,100 metric tons of uncontaminated uranium, which USEC sold on the commercial market for $84.4 million. In addition, in April 2006, DOE sold uranium to obtain funding to compensate USEC for decontamination services that were expected to last from July 2006 through November 2006. According to DOE officials, uranium cleanup activities continued through 2009. In 2005, DOE's Office of Environmental Management, the Bonneville Power Administration, Energy Northwest, and USEC executed a series of agreements to carry out a pilot project to determine whether a portion of DOE's depleted uranium inventory could be used to produce nuclear fuel for Energy Northwest's Columbia Generating Station, a nuclear power reactor near Richland, Washington, the generating capacity of which Bonneville Power Administration had purchased. The depleted uranium tails would be re-enriched and used instead of natural uranium- based feed to produce LEU for the Columbia Generating Station. In March 2012, USEC's financial condition was weakening and, according to DOE officials, USEC was struggling to support the development of the American Centrifuge technology. DOE requested authority to transfer $150 million from existing funds in fiscal year 2012 to support USEC's development of the American Centrifuge technology, but Congress did not provide this authority. Subsequently, DOE entered into a transaction with USEC in March 2012, under which it accepted title to 13,073 MTU of low-assay tails, along with the responsibility for their disposal, from USEC. This enabled USEC to free up $44 million in previously encumbered funds that were being used as collateral for surety bonds to satisfy NRC's financial assurance requirements for the tails' future disposal. In the wake of USEC's bankruptcy filing in April 2014, the Secretary of Energy tasked its Oak Ridge National Laboratory with maintaining the operability of the American Centrifuge technology. As operator of Oak Ridge National Laboratory, UT-Battelle signed an agreement--called the "Domestic Uranium Enrichment - Centrifuge Information and Analysis" agreement--with USEC on May 1, 2014, to maintain the capability of and, where possible, advance the American Centrifuge technology in furtherance of DOE's national security objectives. According to Oak Ridge officials, this agreement provides for the collection of data and provides reports related to the cascade operations and research and development activities. As of January 23, 2015, UT-Battelle had provided USEC $64.5 million in funding. These costs are funded by DOE through UT-Battelle's contract with DOE. Appendix III: Department of Energy Transactions Involving USEC Inc. or Centrus Energy Corp. by Category Category Establishment of USEC Inc. (USEC) In addition to the individual named above, Allison B. Bawden (Assistant Director), Eric Bachhuber, Antoinette Capaccio, Amanda K. Kolling, and Karen Villafana made key contributions to this report. Also contributing to this report were Doreen Eng, Ellen Fried, Risto Laboski, Mehrzad Nadji, Alison O'Neill, Dan C. Royer, and Rebecca Shea.

DOE has had a long and complex relationship with USEC Inc. and its successor, Centrus Energy Corp. Until 2013, USEC, a government corporation that was privatized in 1998, was the only company enriching uranium that, according to DOE, could meet DOE's LEU needs for tritium production. However, USEC ceased enrichment operations in May 2013, and the future of its planned next-generation American Centrifuge enrichment facility is uncertain. GAO has previously reported on financial and other transactions involving DOE and USEC, including transactions that involved the transfer of uranium. GAO was asked to report on the history of the financial relationship between DOE and USEC. This report (1) identifies transactions involving DOE and USEC since USEC was privatized and (2) describes the costs and benefits, if any, of these transactions to DOE, as identified by DOE. GAO defines a transaction as a contract or agreement providing for an exchange of monetary payments, uranium of any type, or services between or involving DOE and USEC occurring from USEC's privatization on July 28, 1998, through July 1, 2015. GAO analyzed key DOE and USEC documents and interviewed DOE and Centrus Energy Corp. officials. The Department of Energy (DOE) has engaged with USEC Inc. (USEC) in 23 transactions since USEC was privatized in 1998 through July 1, 2015. The 23 transactions fall into the following six categories: Establishment of USEC . DOE engaged with USEC in 3 transactions to help establish the company as a private company. For example, from 1998 to 2003, DOE transferred enriched uranium, as required by the USEC Privatization Act, to USEC to establish commercial value for USEC. National security . DOE engaged with USEC in 6 transactions for national security purposes. For example, DOE engaged in several transactions to secure domestic low-enriched uranium (LEU), used in nuclear reactors, for the production of tritium--a radioactive isotope of hydrogen used to enhance the power of nuclear weapons--and support the development of USEC's next-generation American Centrifuge uranium enrichment technology. Facilities management . DOE engaged with USEC in 5 transactions regarding the operation and management of various facilities. For example, after USEC ceased enrichment operations at the Portsmouth Gaseous Diffusion Plant (GDP)--which it leased from DOE--DOE contracted with USEC from 2001 to 2011 to maintain the facility in a dormant condition and prepare it for future decontamination and decommissioning. Nuclear materials management and security . DOE engaged with USEC in 3 transactions to support nuclear materials management. For instance, in a transaction beginning in 1999, DOE agreed to pay USEC to provide safeguards and security services for highly enriched uranium (HEU), which is used in nuclear weapons, that DOE stored at the Portsmouth GDP. Issues from prior transactions . DOE engaged with USEC in 3 transactions to address issues with previous transfers of uranium. For example, in 2003, DOE transferred HEU to USEC to replace previously transferred material that turned out to be contaminated and that did not conform to industry standards. Other . In 2 other transactions, USEC and its subsidiaries paid a fee for access to DOE restricted data related to the centrifuge technology. A third transaction involved a pilot project to determine the usability of certain uranium as nuclear fuel. DOE identified various monetary and nonmonetary costs and benefits of the 23 transactions. DOE was able to identify the costs and benefits for most transactions that have occurred since 2005. For these transactions, DOE incurred costs through the transfer of appropriated funds and various types of uranium, as well as acceptance of responsibility for the future disposition of certain uranium. The benefits DOE received include monetary payments, LEU, and nonmonetary national security benefits. For transactions that occurred or began occurring prior to 2005, DOE was not always able to provide definitive information on its costs and benefits, in part because the agency's accounting system changed in 2004, and agency officials were not able to access information on certain transactions occurring prior to that time. GAO is not making recommendations in this report. DOE reviewed a draft of this report and provided technical comments that GAO incorporated as appropriate.

The Protection and Advocacy system was established in 1975 and was most recently reauthorized in 2000 for 7 years. P&A activities on behalf of individuals with developmental disabilities include legal representation; information and referral services; training and technical assistance in self- advocacy; short-term assistance, mediation and negotiation assistance to obtain benefits and services such as medical care and housing, transportation, and education; representation in administrative appeals; and investigation of reports of abuse and neglect, sexual harassment, inappropriate seclusion and restraint, and other problems. The 57 P&As include 46 that are private, nonprofit agencies; the other 11 are state agencies. P&A staffing typically includes management, investigators, advocates, attorneys, and administrative staff. The P&A in one state we reviewed also contracted with another organization to conduct lawsuits on its behalf. ADD provides annual funding to P&As, the amount of which is determined by a formula that uses several measures, including state population weighted by relative per capita income in the state and a measure of the relative need for services by individuals with developmental disabilities. In fiscal year 2003, ADD funding for P&As was set at $36.3 million, a $1.3 million increase over fiscal year 2002. Funding amounts to states ranged from $345,429 to $2,978,192 for fiscal year 2003. For P&As in California, Maryland, and Pennsylvania, these amounts were $2,978,192, $468,934, and $1,388,495, respectively. P&As also may receive funding from other sources to serve individuals with developmental disabilities, including state and private funds. In addition, P&As often serve populations other than individuals with developmental disabilities and receive separate funding for that purpose. Although state developmental disabilities services agencies are primarily responsible for arranging for the provision of services and oversight of quality for services received by individuals with developmental disabilities, the DD Act authorizes P&As to play an important role in monitoring these services. The DD Act authorizes P&As to investigate allegations of abuse and neglect when reported or if there is probable cause to believe that incidents occurred and to pursue legal, administrative, and other appropriate remedies or approaches on behalf of individuals with developmental disabilities. The act grants P&As access to individuals with developmental disabilities and to their records, including reports prepared by agencies or staff on injuries or deaths. Under this authority, P&As typically undertake monitoring efforts to review the adequacy of services that individuals receive in institutions and in community settings and to examine state oversight of quality assurance and regulatory compliance for residential services providers. Many individuals with developmental disabilities for whom P&As advocate are eligible to receive publicly financed residential services through Medicaid, which is the largest source of funds for services for individuals with developmental disabilities. State developmental disabilities services agencies have primary responsibility for monitoring the quality of services provided to individuals with developmental disabilities, including those services funded by Medicaid. In 2002, Medicaid financed 77 percent ($26.8 billion) of the total $34.7 billion in total long-term care spending on individuals with developmental disabilities. Medicaid spending was about $10.9 billion for ICF/MR residents including those living in large institutions; about $12.9 billion for individuals with developmental disabilities receiving home and community-based services (HCBS) under Medicaid waivers; and an additional $2.9 billion for other services provided in community settings, such as personal care. Residential choices for individuals with developmental disabilities vary by state since states choose whether to offer these individuals services in ICF/MRs, which is an optional rather than a mandatory benefit in Medicaid, and whether to provide services in community settings through HCBS waivers. States may apply to the Centers for Medicare & Medicaid Services (CMS) for waivers under section 1915(c) of the Social Security Act to provide HCBS services as an alternative to institutional care in ICF/MRs and waive certain Medicaid requirements that would otherwise apply, such as statewideness, which requires that services be available throughout the state, and comparability, which requires that all services be available to all eligible individuals. For both the ICF/MR and waiver programs, protecting the health and welfare of Medicaid-covered individuals receiving services is a shared federal-state responsibility. Under the ICF/MR optional benefit program, states annually inspect institutions to ensure that they meet federal quality standards. Under Medicaid waivers, states must include assurances to CMS that necessary safeguards are in place to protect beneficiaries. In pursuing legal remedies on behalf of individuals with developmental disabilities, P&As have represented individuals as well as groups or classes of individuals in lawsuits. All such lawsuits are subject to rules of procedure that govern proceedings in the relevant court. Many of these cases take place in federal court, where the Federal Rules of Civil Procedure (FRCP) apply. FRCP Rule 23 establishes procedural requirements for class action lawsuits in federal district court, including the circumstances under which individuals must be notified of their inclusion in a class prior to class formation, referred to as certification by the court, and notified of proposed settlements of lawsuits on their behalf. The requirements vary depending upon whether the suit is for injunctive relief or monetary damages. Lawsuits for injunctive relief seek a court order requiring another party to do or refrain from doing a specified act. For suits seeking injunctive relief, the type of class action suit P&As generally bring, the rule does not require notification of individuals' inclusion in a class prior to class formation. The rule does, however, require notification of class members at the time of proposed settlement. By contrast, for class action suits seeking monetary relief, the rule requires that individuals be notified of their inclusion in a class prior to its formation. Nationwide and for the three states reviewed, lawsuits related to deinstitutionalization on behalf of individuals with developmental disabilities constitute a small part of overall P&A activities. We identified 24 lawsuits nationwide that P&As filed, joined, or intervened in related to deinstitutionalization from 1975 through 2002. P&As filed or intervened in six of these suits in the three states we examined--California, Maryland, and Pennsylvania--during this same period. Three of the six suits were settled as class actions. The three other suits were intended but not settled as class action lawsuits. P&As in these three states reported that they used litigation of all types, including litigation related to deinstitutionalization, in 1.5 percent of client problems they addressed from fiscal years 1999 through 2001. National data sources indicate that, from 1975 through 2002, P&As filed, joined, or intervened in approximately 24 lawsuits related to deinstitutionalization on behalf of individuals with developmental disabilities. (See app. II.) Most but not all of these lawsuits were intended to be class actions against large public institutions for persons with mental retardation and other developmental disabilities. Moreover, P&As reported that, relative to other activities, they spent a small proportion of staff time on filing class action lawsuits on behalf of individuals with developmental disabilities. Nationally, P&As reported spending about 2 percent of their staff time for this purpose in 2001. From 1975 through 2002, P&As in the three states we reviewed filed or intervened in six lawsuits related to deinstitutionalization on behalf of individuals with developmental disabilities. (See table 1.) Of the six lawsuits, four were brought in federal court and two were brought in state court. Three of these suits were settled as class action lawsuits. The other three suits were intended as class actions but not certified as such by their respective courts. Of these three, one in Maryland was dismissed by mutual agreement of the parties, one in California was settled by a multiparty agreement, and another in California is pending. Although most of the suits were settled a number of years ago, the impact of the suits can be ongoing. For example, the Nelson v. Snider suit in Pennsylvania was settled in 1994 but was part of the impetus for closing the Embreeville Center in 1998. Complaints brought in these lawsuits included allegations of inappropriate care and treatment in state institutions, including abuse and neglect, and violations of constitutional due process rights as well as rights under the Rehabilitation Act of 1973 and the Americans with Disabilities Act. The three class action suits resulted in court-ordered settlements requiring state officials to take a variety of actions, including placing of individuals with developmental disabilities in community settings, downsizing or closing of state institutions, and establishing and overseeing of certain quality assurance standards. P&As in California, Maryland, and Pennsylvania used litigation infrequently to address client problems according to available data from fiscal years 1999 to 2001. In their annual reports to ADD, P&As in these states reported using litigation to address 272 client problems over the 3- year period, or about 1.5 percent of all problems addressed. (See table 2.) This included litigation on behalf of named plaintiffs in deinstitutionalization litigation, such as class action lawsuits, and other litigation, such as litigation filed on behalf of individuals. By contrast, P&As reported using other services to address 17,947 client problems, more than 98 percent of all problems addressed. These services include contacting state officials for individuals in need of services such as health care, negotiation and mediation help, technical assistance in self- advocacy, and representation at administrative hearings. P&As in the three states communicated with parents and guardians as required by federal rules in the lawsuits we reviewed. In the three cases settled as class actions, P&As provided notice to all class members at the time settlement was proposed to the court, as required by federal rules. Such notice was not required in the other three cases we reviewed, which were not class actions. Even though P&As provided the notice required by federal rules in the lawsuits we examined, representatives of some parent groups told us they believed that P&As should have communicated with parents and guardians before filing or intervening in these lawsuits and prior to class certification by the court. P&As in the three states reviewed indicated that they did not try to communicate with all individuals potentially affected by the six lawsuits, including parents and guardians, but did communicate with organizations representing some parents and guardians during these stages of the lawsuits. However, even if P&As had provided notification during the stages specified by the parents and guardians, under the applicable federal rule of civil procedure an individual has no explicit right to opt out of a class in this type of case. In the three class action lawsuits we reviewed, P&As complied with FRCP Rule 23, which requires communication with all class members prior to settlement. Two of these lawsuits were filed and settled in federal district court, where the FRCP applied directly, and one lawsuit was filed and settled in California superior court, where, under prevailing law at that time, the judge applied the FRCP. FRCP Rule 23 does not require notification of class members prior to class certification in lawsuits seeking injunctive relief, the type of lawsuits generally brought by P&As, although such notice is required in class action lawsuits seeking monetary damages. However, FRCP Rule 23 does require notification at the time of proposed settlement for all class action lawsuits--including those seeking injunctive relief. It specifies that such notice "shall be given to all members of the class in such manner as the court directs." This notice guarantees that unnamed class members will receive notice of any proposed settlement and have an opportunity to register objections with the court, thereby assisting the court in determining whether the proposed settlement is fair, adequate, and reasonable. We confirmed that such notice was provided in each of the three cases. Such notice was not required in the other three cases we reviewed, which were not class action lawsuits. P&As' communication before a settlement was proposed to the court was not as comprehensive as some parents desired in the lawsuits we reviewed. Representatives of some parent groups told us they were not satisfied with the extent of P&A communication because they believed that P&As should have communicated with parents and guardians in the six lawsuits we examined before filing or intervening in the suits and prior to class certification by the court. P&A officials in California, Maryland, and Pennsylvania told us that they did not try to communicate with all individuals, including parents and guardians, potentially affected by the six lawsuits until a settlement was proposed to the court. However, P&As were not required to provide such communication. In a discussion with NAPAS, the national organization representing P&As, an official told us that for P&As to attempt to contact all such individuals would require considerable time and expense, which would make providing such notice extremely difficult. Furthermore, he said that P&As would not generally wish to provide such notice unless required to do so because this could provide defendants with information they might use to oppose litigation. Nevertheless, P&A officials said that they met or attempted to meet with organizations representing some parents and guardians of affected individuals during the lawsuits. The context of the meetings varied with the circumstances of the six lawsuits. For example, a California P&A official indicated that, both before and after filing the Coffelt lawsuit in 1990, the P&A met with organizations representing the parents and guardians of residents of at least three of the institutions affected. In the other two California lawsuits, Richard S. (1997) and Capitol People First (2002), a California P&A official indicated that the P&A met with and represented organizations whose members included the families of institutional residents, and met with individual family members before and during the litigation. The P&A did not, however, meet with parent organizations specifically associated with the institutions. In both of those lawsuits, the organizations specifically associated with the institutions were or are involved as parties, thus complicating direct communication between the P&A and parents and guardians who might belong to these organizations. A Maryland P&A official told us that, before filing the Hunt v. Meszaros litigation in 1991, the P&A met with an organization representing parents and guardians of residents of the affected facility-- the Great Oaks Center. A Pennsylvania P&A official told us that the P&A met with a parent group representing Embreeville Center residents during the Nelson v. Snider litigation (1994)--both before filing the lawsuit and after the court's certification of a class action. These efforts were complicated by the fact that this organization had already filed another lawsuit against the state. A Pennsylvania P&A official said that the P&A tried unsuccessfully to meet with an organization representing parents and guardians of Western Center residents prior to filing the Richard C. v. Snider lawsuit (1989) and that such efforts were complicated by another lawsuit filed against the P&A by that organization. Representatives of some parent groups, however, told us that P&A communication concerning the lawsuits with parents and guardians of affected individuals was limited. Three of the six lawsuits we examined--Nelson v. Snider, Richard. C. v. Snider, and Coffelt v. California Department of Developmental Services--were certified by the courts as class actions. The P&As indicated that they did not attempt to notify all prospective class members prior to certification of their classes by the court for the reasons discussed above. P&As told us they maintained regular contact with all named plaintiffs in the lawsuits. Representatives of some parent groups said that parents and guardians of individuals affected as unnamed class members in the lawsuits had insufficient opportunity to express their views about the inclusion of their adult children in the class and were not notified that their children might be included until the settlement was proposed to the court. As a result, some individuals may have been included in class actions even though they or their parents or guardians opposed their inclusion. As a matter of law, however, these individuals would have had limited influence even if they had been able to express their views. In class action suits seeking injunctive relief, such as the three we examined, the court focuses on the circumstances of the class as a whole as opposed to those affecting individual members. In such suits, under the rules governing such litigation, an individual has no explicit right to opt out of a class as certified by the court. By contrast, there is an explicit right to opt out of a class in class action lawsuits that seek monetary compensation. P&As assumed various roles in monitoring the health and well-being of individuals with developmental disabilities transferred from institutions to community settings in four of five lawsuits we reviewed in California, Maryland, and Pennsylvania that had been resolved. (See table 3.) No P&A monitoring role has been established in the sixth suit we reviewed, in which litigation is ongoing. In these three states, P&A roles and responsibilities varied with the circumstances of the lawsuits and initiatives P&As undertook as part of their general role to protect and advocate the rights of individuals with developmental disabilities. State developmental disabilities services agencies, however, continue to have the primary responsibility for ensuring the health and well-being of individuals, including monitoring these individuals when they receive services in the community. Representatives of some parent groups told us that parents and guardians have been dissatisfied with the adequacy of P&As' monitoring role in community placements, while representatives of other parent groups told us they generally supported the P&A monitoring role. With respect to the three lawsuits filed and settled as class actions, the settlement agreements did not specify a monitoring role for the P&As, but the P&As assumed specific roles in monitoring individuals transferred to the community. Regarding the other three lawsuits not settled as class actions, the P&A also undertook a role in monitoring affected individuals in one of these suits. P&As are not playing a monitoring role in the other two suits--in one because of the nature of the suit, and in the other because litigation is ongoing. For the three lawsuits settled as class actions--Coffelt (California), Richard C. (Pennsylvania), and Nelson (Pennsylvania)--the P&As assumed the role of monitoring some or all class members transferred to community settings. As a result of the Coffelt settlement in 1994, the California P&A has undertaken the role of monitoring individuals using information that the state was required to provide, such as annual reports about quality of life in community settings, based on consumer and family surveys. P&A monitoring responsibilities for Coffelt's 11 named plaintiffs involved regular communication with these individuals. For Richard C., a Pennsylvania P&A official told us that the P&A role included hiring an advocate to monitor services provided to all class members while they were still living at the Western Center and after their placement in community settings. This advocate was expected to visit each class member discharged from the Western Center after 1994 at least once. A P&A official said that monitoring included face-to-face interaction with class members living at the Western Center or in the community. The P&A has ongoing responsibility for monitoring several individuals who were moved from the Western Center to the Ebensburg Center, another state facility for individuals with mental retardation. For the Nelson lawsuit settled in 1994, the P&A undertook the responsibility to follow 50 class members who did not have involved family members, in addition to monitoring six named plaintiffs. P&As have assumed a role in monitoring state development and implementation of quality assurance mechanisms established by all three settlement agreements to improve services provided in community settings and evaluate services delivered in the community. Thus, these agreements have long-lasting implications for state and P&A monitoring activities because implementation of the settlement agreements may take years to complete. Of the three other lawsuits we reviewed, one was settled, one was dismissed, and the third is ongoing litigation. In the settled suit, Richard S. (California), the P&A did not undertake a monitoring role as a result of this lawsuit. In this suit, the P&A intervention was intended to overturn California state policy permitting family member or guardian veto of community placement decisions, an outcome that did not lead to a P&A role in monitoring individuals affected by this suit. However, California P&A officials reported that the P&A had the role of monitoring the well- being of all individuals who moved from institutions to the community, including individuals affected by the Richard S. suit, based on the role assumed by the P&A in the Coffelt case. In the dismissed suit Hunt (Maryland), the P&A undertook a certain role to monitor plaintiffs and other affected individuals. The Hunt lawsuit was dismissed in 1999 following closure of the Great Oaks Center in 1996. However, the P&A and Arc of Maryland officials reported having a role in assisting families of individuals who had problems with community placements. Finally, California's Capitol People First (filed in 2002) is in the early stages of litigation and has not yet addressed a P&A monitoring role. Parent groups we interviewed had differing views about the role P&As played in monitoring individuals in the five resolved lawsuits we reviewed. Representatives of some parent groups were generally dissatisfied with the adequacy of P&As' efforts to monitor the health and well-being of individuals transferred to community settings, while representatives of other parent groups, who were generally in favor of these lawsuits, supported P&As' monitoring approaches. Those parent groups that were dissatisfied said that in supporting states' "rapid" deinstitutionalization efforts, P&As disregarded parents' concerns about service quality deficiencies in community settings and the needs of individuals with severe developmental disabilities, who tend to be medically fragile. They also stated that P&A staff did not adequately monitor individuals who were moved to community settings. In contrast, representatives of other parent groups generally supported the P&A role in monitoring community placements. For example, a representative of one parent group said that the Maryland P&A collaborated with this group in developing a family guide to community programs for people affected by the Hunt lawsuit. Other parent groups said the Pennsylvania P&A was instrumental in establishing consumer and family satisfaction teams to monitor the quality of services provided to individuals and families affected by the Nelson lawsuit. We provided a draft of this report to ACF and to the California, Maryland, and Pennsylvania P&As for their review. ACF said it was a thorough analysis of the three P&As' involvement in deinstitutionaliation lawsuits for the population examined. ACF's written comments are in appendix III. The three P&As stated that the report is accurate, and provided technical comments. We incorporated technical comments as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to the Assistant Secretary for Children and Families and the Commissioner of the Administration on Developmental Disabilities in the Department of Health and Human Services, interested congressional committees, and other parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-7118. Another contact and key contributors are listed in appendix IV. We examined (1) the extent to which Protection and Advocacy agencies (P&As) engage in litigation related to deinstitutionalization on behalf of individuals with developmental disabilities, (2) how P&As have communicated with parents and legal guardians in deinstitutionalization lawsuits, and (3) the role, if any, that P&As have played in monitoring the health and well-being of individuals transferred from institutions to community settings within the context of these lawsuits. To determine the extent to which P&As engage in litigation related to deinstitionalization on behalf of individuals with developmental disabilities, we compared data from several sources and consulted with national and state organizations because there is no single, national source of information on P&A litigation activities. We analyzed information from two key studies that provide extensive information on deinstitutionalization lawsuits, interviewed the authors of these studies, and examined information on lawsuits provided by the National Association of Protection & Advocacy Systems, Inc. (NAPAS) and Voice of the Retarded (VOR). We also interviewed officials from the Administration on Developmental Disabilities (ADD) in the Administration for Children and Families in the Department of Health and Human Services (HHS), NAPAS, the National Association of State Directors of Developmental Disabilities Services, and the VOR; representatives of several other family advocacy organizations, including the Arc of the United States; and P&A officials in the three states. From these sources, we compiled a national list of 24 deinstitutionalization lawsuits confirmed by NAPAS or state P&As that P&As filed, joined, or intervened in on behalf of individuals with developmental disabilities from 1975 through 2002. (See app. II for a list of all 24 cases identified.) From the national list we identified six lawsuits in three states--California, Maryland, and Pennsylvania--to study in more detail. National organizations that we consulted indicated that these states' P&As are more active in deinstitutionalization litigation. In addition, we analyzed research on national trends in litigation for institutionalized individuals with developmental disabilities, consulted individuals knowledgeable about P&A deinstitutionalization lawsuits, and examined aggregate and state-specific ADD data from 1999 through 2001 on P&A litigation services provided to this population. To determine how P&As communicated with parents and legal guardians of individuals with developmental disabilities in deinstitutionalization lawsuits, we focused on the six lawsuits in California, Maryland, and Pennsylvania. We reviewed class action notification requirements for plaintiffs in federal and state courts and analyzed settlement agreements and other documents related to the six lawsuits. We also discussed the extent of P&A communication with individuals potentially affected by class action litigation with P&A officials and parent representatives in these states. Finally, to determine the role P&As play in monitoring individuals who have been moved from institutions to community settings, we reviewed the authority P&As have under the Developmental Disabilities Assistance and Bill of Rights Act of 2000 to protect and advocate the rights of individuals with developmental disabilities. We interviewed P&A officials in the three states about their roles and responsibilities and reviewed applicable deinstitutionalization settlement agreements and related documentation that they provided. We also interviewed officials from these states' developmental disabilities services agencies who have primary responsibility for ensuring the quality of services provided to individuals with developmental disabilities. We did not attempt to assess the effectiveness of P&A and state agencies' quality monitoring efforts nor to generalize our study findings to P&As nationwide. We did our work from October 2002 through September 2003 in accordance with generally accepted government auditing standards. P&A intervened. Reviewed by GAO. In addition to the person named above, key contributors to this report were Anne Montgomery, Carmen Rivera-Lowitt, George Bogart, and Elizabeth T. Morrison. Long-Term Care: Federal Oversight of Growing Medicaid Home and Community-Based Waivers Should Be Strengthened. GAO-03-576. Washington, D.C.: June 20, 2003. Children with Disabilities: Medicaid Can Offer Important Benefits and Services. GAO/T-HEHS-00-152. Washington, D.C.: July 12, 2000. Mental Health: Improper Restraint or Seclusion Use Places People at Risk. GAO/HEHS-99-176. Washington, D.C.: September 7, 1999. Adults with Severe Disabilities: Federal and State Approaches for Personal Care and Other Services. GAO/HEHS-99-101. Washington, D.C.: May 14, 1999. Medicaid: Oversight of Institutions for the Mentally Retarded Should Be Strengthened. GAO/HEHS-96-131. Washington, D.C.: September 6, 1996. Medicaid: Waiver Program for Developmentally Disabled Is Promising but Poses Some Risks. GAO/HEHS-96-120. Washington, D.C.: July 22, 1996.

Congress established the Protection and Advocacy system in 1975 to protect the rights of individuals with developmental disabilities, most of whom have mental retardation. Protection and Advocacy agencies (P&A) use investigative and legal activities to advocate on behalf of these individuals. Deinstitutionalization has refocused delivery of care to this population over the last several decades from large public institutions to community settings. Refocusing service delivery resulted from (1) the desire to deliver care in the most integrated setting and to control costs and (2) the outcomes of deinstitutionalization lawsuits brought by P&As and others. Some parents have raised concerns that P&As emphasize these suits over other activities, inadequately inform them of family members' inclusion in the suits, and do not adequately monitor individuals after their transfer to the community. GAO was asked to review the extent to which P&As engage in lawsuits related to deinstitutionalization of these individuals, how P&As communicate with affected parents and guardians in these suits, and the role P&As have played in monitoring the well-being of individuals transferred to the community. GAO compiled a national list of lawsuits related to deinstitutionalization involving P&As and reviewed the suits and related activities in three states--California, Maryland, and Pennsylvania. Lawsuits related to deinstitutionalization brought on behalf of persons with developmental disabilities are a small part of P&As' overall activities for this population. GAO identified 24 such lawsuits that P&As filed, joined, or intervened in from 1975 through 2002. During the same period, P&As filed or intervened in 6 of these lawsuits in the three states GAO reviewed--California, Maryland, and Pennsylvania. Three of the 6 were settled as class actions; the other 3 were intended, but not settled, as class actions. One is ongoing, one was dismissed, and one was settled by multiparty agreement. P&As' communications with parents and guardians regarding the lawsuits in the three states were consistent with federal rules. For the three suits settled as class actions, P&As complied with the requirement to provide notice to all class members when a settlement agreement is proposed to the court. Such notice was not required in the other three cases, which were not class actions. Representatives of some parent groups told GAO that parents and guardians were dissatisfied with the extent of P&A communication with them before a settlement was proposed, citing problems such as not receiving notice of a family member's inclusion in the class, which the parent or guardian opposed. P&As in the three states told GAO they did not communicate with every person potentially affected by the six lawsuits before a proposed settlement agreement, although they did communicate with organizations representing some parents and guardians during that time. However, even if P&As had made such notification, under the applicable federal rule of civil procedure, an individual has no explicit right to opt out of the class in this type of case. P&As in the three states assumed various roles in monitoring the health and well-being of individuals transferred to community settings in four of the five resolved lawsuits we reviewed, although state developmental disabilities services agencies have the primary responsibility for ensuring the quality of services provided to these individuals. P&As' roles varied with the circumstances of the lawsuits and the initiatives P&As in the three states undertook using their authority to protect and advocate the rights of individuals with developmental disabilities. For example, although the three class action settlement agreements did not specify monitoring roles, the P&As assumed roles, such as reviewing information about the quality of community services that the settlement agreements required the states to develop and reviewing care plans of individuals who had been transferred. Representatives of some parent groups told GAO that parents and guardians have been dissatisfied with the adequacy of the P&As' monitoring role in community placements, while representatives of other parent groups said they generally supported the P&A monitoring role. The Administration for Children and Families said GAO's analysis of the three P&As' involvement in deinstitutionalization lawsuits is thorough and the P&As GAO reviewed said that the report is accurate.

A domestic bioterrorist attack is considered to be a low-probability event, in part because of the various difficulties involved in successfully delivering biological agents to achieve large-scale casualties. However, a number of cases involving biological agents, including at least one completed bioterrorist act and numerous threats and hoaxes, have occurred domestically. In 1984, a group intentionally contaminated salad bars in restaurants in Oregon with salmonella bacteria. Although no one died, 751 people were diagnosed with foodborne illness. Some experts predict that more domestic bioterrorist attacks are likely to occur. The burden of responding to such an attack would fall initially on personnel in state and local emergency response agencies. These "first responders" include firefighters, emergency medical service personnel, law enforcement officers, public health officials, health care workers (including doctors, nurses, and other medical professionals), and public works personnel. If the emergency required federal disaster assistance, federal departments and agencies would respond according to responsibilities outlined in the Federal Response Plan. Several groups, including the Advisory Panel to Assess Domestic Response Capabilities for Terrorism Involving Weapons of Mass Destruction (known as the Gilmore Panel), have assessed the capabilities at the federal, state, and local levels to respond to a domestic terrorist incident involving a weapon of mass destruction (WMD), that is, a chemical, biological, radiological, or nuclear agent or weapon. While many aspects of an effective response to a bioterrorism are the same as those for any disaster, there are some unique features. For example, if a biological agent is released covertly, it may not be recognized for a week or more because symptoms may not appear for several days after the initial exposure and may be misdiagnosed at first. In addition, some biological agents, such as smallpox, are communicable and can spread to others who were not initially exposed. These differences require a type of response that is unique to bioterrorism, including infectious disease surveillance, epidemiologic investigation, laboratory identification of biological agents, and distribution of antibiotics to large segments of the population to prevent the spread of an infectious disease. However, some aspects of an effective response to bioterrorism are also important in responding to any type of large-scale disaster, such as providing emergency medical services, continuing health care services delivery, and managing mass fatalities. Federal spending on domestic preparedness for terrorist attacks involving WMDs has risen 310 percent since fiscal year 1998, to approximately $1.7 billion in fiscal year 2001, and may increase significantly after the events of September 11, 2001. However, only a portion of these funds were used to conduct a variety of activities related to research on and preparedness for the public health and medical consequences of a bioterrorist attack. We cannot measure the total investment in such activities because departments and agencies provided funding information in various forms--as appropriations, obligations, or expenditures. Because the funding information provided is not equivalent, we summarized funding by department or agency, but not across the federal government (see apps. I and II). Research is currently being done to enable the rapid identification of biological agents in a variety of settings; develop new or improved vaccines, antibiotics, and antivirals to improve treatment and vaccination for infectious diseases caused by biological agents; and develop and test emergency response equipment such as respiratory and other personal protective equipment. Appendix I provides information on the total reported funding for all the departments and agencies carrying out research, along with examples of this research. The Department of Agriculture (USDA), Department of Defense (DOD), Department of Energy, Department of Health and Human Services (HHS), Department of Justice (DOJ), Department of the Treasury, and the Environmental Protection Agency (EPA) have all sponsored or conducted projects to improve the detection and characterization of biological agents in a variety of different settings, from water to clinical samples (such as blood). For example, EPA is sponsoring research to improve its ability to detect biological agents in the water supply. Some of these projects, such as those conducted or sponsored by the DOD and DOJ, are not primarily for the public health and medical consequences of a bioterrorist attack against the civilian population, but could eventually benefit research for those purposes. Departments and agencies are also conducting or sponsoring studies to improve treatment and vaccination for diseases caused by biological agents. For example, HHS' projects include basic research sponsored by the National Institutes of Health to develop drugs and diagnostics and applied research sponsored by the Agency for Healthcare Research and Quality to improve health care delivery systems by studying the use of information systems and decision support systems to enhance preparedness for the delivery of medical care in an emergency. In addition, several agencies, including the Department of Commerce's National Institute of Standards and Technology and the DOJ's National Institute of Justice are conducting research that focuses on developing performance standards and methods for testing the performance of emergency response equipment, such as respirators and personal protective equipment. Federal departments' and agencies' preparedness efforts have included efforts to increase federal, state, and local response capabilities, develop response teams of medical professionals, increase availability of medical treatments, participate in and sponsor terrorism response exercises, plan to aid victims, and provide support during special events such as presidential inaugurations, major political party conventions, and the Superbowl. Appendix II contains information on total reported funding for all the departments and agencies with bioterrorism preparedness activities, along with examples of these activities. Several federal departments and agencies, such as the Federal Emergency Management Agency (FEMA) and the Centers for Disease Control and Prevention (CDC), have programs to increase the ability of state and local authorities to successfully respond to an emergency, including a bioterrorist attack. These departments and agencies contribute to state and local jurisdictions by helping them pay for equipment and develop emergency response plans, providing technical assistance, increasing communications capabilities, and conducting training courses. Federal departments and agencies have also been increasing their own capacity to identify and deal with a bioterrorist incident. For example, CDC, USDA, and the Food and Drug Administration (FDA) are improving surveillance methods for detecting disease outbreaks in humans and animals. They have also established laboratory response networks to maintain state-of-the-art capabilities for biological agent identification and characterization of human clinical samples. Some federal departments and agencies have developed teams to directly respond to terrorist events and other emergencies. For example, HHS' Office of Emergency Preparedness (OEP) created Disaster Medical Assistance Teams to provide medical treatment and assistance in the event of an emergency. Four of these teams, known as National Medical Response Teams, are specially trained and equipped to provide medical care to victims of WMD events, such as bioterrorist attacks. Several agencies are involved in increasing the availability of medical supplies that could be used in an emergency, including a bioterrorist attack. CDC's National Pharmaceutical Stockpile contains pharmaceuticals, antidotes, and medical supplies that can be delivered anywhere in the United States within 12 hours of the decision to deploy. The stockpile was deployed for the first time on September 11, 2001, in response to the terrorist attacks on New York City. Federally initiated bioterrorism response exercises have been conducted across the country. For example, in May 2000, many departments and agencies took part in the Top Officials 2000 exercise (TOPOFF 2000) in Denver, Colorado, which featured the simulated release of a biological agent. Participants included local fire departments, police, hospitals, the Colorado Department of Public Health and the Environment, the Colorado Office of Emergency Management, the Colorado National Guard, the American Red Cross, the Salvation Army, HHS, DOD, FEMA, the Federal Bureau of Investigation (FBI), and EPA. Several agencies also provide assistance to victims of terrorism. FEMA can provide supplemental funds to state and local mental health agencies for crisis counseling to eligible survivors of presidentially declared emergencies. In the aftermath of the recent terrorist attacks, HHS released $1 million in funding to New York State to support mental health services and strategic planning for comprehensive and long-term support to address the mental health needs of the community. DOJ's Office of Justice Programs (OJP) also manages a program that provides funds for victims of terrorist attacks that can be used to provide a variety of services, including mental health treatment and financial assistance to attend related criminal proceedings. Federal departments and agencies also provide support at special events to improve response in case of an emergency. For example, CDC has deployed a system to provide increased surveillance and epidemiological capacity before, during, and after special events. Besides improving emergency response at the events, participation by departments and agencies gives them valuable experience working together to develop and practice plans to combat terrorism. Federal departments and agencies are using a variety of interagency plans, work groups, and agreements to coordinate their activities to combat terrorism. However, we found evidence that coordination remains fragmented. For example, several different agencies are responsible for various coordination functions, which limits accountability and hinders unity of effort; several key agencies have not been included in bioterrorism-related policy and response planning; and the programs that agencies have developed to provide assistance to state and local governments are similar and potentially duplicative. The President recently took steps to improve oversight and coordination, including the creation of the Office of Homeland Security. Over 40 federal departments and agencies have some role in combating terrorism, and coordinating their activities is a significant challenge. We identified over 20 departments and agencies as having a role in preparing for or responding to the public health and medical consequences of a bioterrorist attack. Appendix III, which is based on the framework given in the Terrorism Incident Annex of the Federal Response Plan, shows a sample of the coordination efforts by federal departments and agencies with responsibilities for the public health and medical consequences of a bioterrorist attack, as they existed prior to the recent creation of the Office of Homeland Security. This figure illustrates the complex relationships among the many federal departments and agencies involved. Departments and agencies use several approaches to coordinate their activities on terrorism, including interagency response plans, work groups, and formal agreements. Interagency plans for responding to a terrorist incident help outline agency responsibilities and identify resources that could be used during a response. For example, the Federal Response Plan provides a broad framework for coordinating the delivery of federal disaster assistance to state and local governments when an emergency overwhelms their ability to respond effectively. The Federal Response Plan also designates primary and supporting federal agencies for a variety of emergency support operations. For example, HHS is the primary agency for coordinating federal assistance in response to public health and medical care needs in an emergency. HHS could receive support from other agencies and organizations, such as DOD, USDA, and FEMA, to assist state and local jurisdictions. Interagency work groups are being used to minimize duplication of funding and effort in federal activities to combat terrorism. For example, the Technical Support Working Group is chartered to coordinate interagency research and development requirements across the federal government in order to prevent duplication of effort between agencies. The Technical Support Working Group, among other projects, helped to identify research needs and fund a project to detect biological agents in food that can be used by both DOD and USDA. Formal agreements between departments and agencies are being used to share resources and knowledge. For example, CDC contracts with the Department of Veterans Affairs (VA) to purchase drugs and medical supplies for the National Pharmaceutical Stockpile because of VA's purchasing power and ability to negotiate large discounts. Overall coordination of federal programs to combat terrorism is fragmented. For example, several agencies have coordination functions, including DOJ, the FBI, FEMA, and the Office of Management and Budget. Officials from a number of the agencies that combat terrorism told us that the coordination roles of these various agencies are not always clear and sometimes overlap, leading to a fragmented approach. We have found that the overall coordination of federal research and development efforts to combat terrorism is still limited by a number of factors, including the compartmentalization or security classification of some research efforts.The Gilmore Panel also concluded that the current coordination structure does not provide for the requisite authority or accountability to impose the discipline necessary among the federal agencies involved. The multiplicity of federal assistance programs requires focus and attention to minimize redundancy of effort. Table 1 shows some of the federal programs providing assistance to state and local governments for emergency planning that would be relevant to responding to a bioterrorist attack. While the programs vary somewhat in their target audiences, the potential redundancy of these federal efforts highlights the need for scrutiny. In our report on combating terrorism, issued on September 20, 2001, we recommended that the President, working closely with the Congress, consolidate some of the activities of DOJ's OJP under FEMA. We have also recommended that the federal government conduct multidisciplinary and analytically sound threat and risk assessments to define and prioritize requirements and properly focus programs and investments in combating terrorism. Such assessments would be useful in addressing the fragmentation that is evident in the different threat lists of biological agents developed by federal departments and agencies. Understanding which biological agents are considered most likely to be used in an act of domestic terrorism is necessary to focus the investment in new technologies, equipment, training, and planning. Several different agencies have or are in the process of developing biological agent threat lists, which differ based on the agencies' focus. For example, CDC collaborated with law enforcement, intelligence, and defense agencies to develop a critical agent list that focuses on the biological agents that would have the greatest impact on public health. The FBI, the National Institute of Justice, and the Technical Support Working Group are completing a report that lists biological agents that may be more likely to be used by a terrorist group working in the United States that is not sponsored by a foreign government. In addition, an official at USDA's Animal and Plant Health Inspection Service told us that it uses two lists of agents of concern for a potential bioterrorist attack developed through an international process (although only some of these agents are capable of making both animals and humans sick). According to agency officials, separate threat lists are appropriate because of the different focuses of these agencies. In our view, the existence of competing lists makes the assignment of priorities difficult for state and local officials. Fragmentation has also hindered unity of effort. Officials at the Department of Transportation (DOT) told us that the department has been overlooked in bioterrorism-related planning and policy. DOT officials noted that even though the nation's transportation centers account for a significant percentage of the nation's potential terrorist targets, DOT was not part of the founding group of agencies that worked on bioterrorism issues and has not been included in bioterrorism response plans. DOT officials also told us that the department is supposed to deliver supplies for FEMA under the Federal Response Plan, but it was not brought into the planning early enough to understand the extent of its responsibilities in the transportation process. The department learned what its responsibilities would be during TOPOFF 2000. In May 2001, the President asked the Vice President to oversee the development of a coordinated national effort dealing with WMDs. At the same time, the President asked the Director of FEMA to establish an Office of National Preparedness to implement the results of the Vice President's effort that relate to programs within federal agencies that address consequence management resulting from the use of WMDs. The purpose of this effort is to better focus policies and ensure that programs and activities are fully coordinated in support of building the needed preparedness and response capabilities. In addition, on September 20, 2001, the President announced the creation of the Office of Homeland Security to lead, oversee, and coordinate a comprehensive national strategy to protect the country from terrorism and respond to any attacks that may occur. These actions represent potentially significant steps toward improved coordination of federal activities. In a recent report, we listed a number of important characteristics and responsibilities necessary for a single focal point, such as the proposed Office of Homeland Security, to improve coordination and accountability. Nonprofit research organizations, congressionally chartered advisory panels, government documents, and articles in peer-reviewed literature have identified concerns about the preparedness of states and local areas to respond to a bioterrorist attack. These concerns include insufficient state and local planning for response to terrorist events, inadequacies in the public health infrastructure, a lack of hospital participation in training on terrorism and emergency response planning, insufficient capacity for treating mass casualties from a terrorist act, and questions regarding the timely availability of medical teams and resources in an emergency. Questions exist regarding how effectively federal programs have prepared state and local governments to respond to terrorism. All 50 states and approximately 255 local jurisdictions have received or are scheduled to receive at least some federal assistance, including training and equipment grants, to help them prepare for a terrorist WMD incident. In 1997, FEMA identified planning and equipment for response to nuclear, biological, and chemical incidents as an area in need of significant improvement at the state level. However, an October 2000 report concluded that even those cities receiving federal aid are still not adequately prepared to respond to a bioterrorist attack. Components of the nation's infectious disease surveillance system are also not well prepared to detect or respond to a bioterrorist attack. Reductions in public health laboratory staffing and training have affected the ability of state and local authorities to identify biological agents. Even the initial West Nile virus outbreak in 1999, which was relatively small and occurred in an area with one of the nation's largest local public health agencies, taxed the federal, state, and local laboratory resources. Both the New York State and the CDC laboratories were inundated with requests for tests, and the CDC laboratory handled the bulk of the testing because of the limited capacity at the New York laboratories. Officials indicated that the CDC laboratory would have been unable to respond to another outbreak, had one occurred at the same time. In fiscal year 2000, CDC awarded approximately $11 million to 48 states and four major urban health departments to improve and upgrade their surveillance and epidemiological capabilities. Inadequate training and planning for bioterrorism response by hospitals is a major problem. The Gilmore Panel concluded that the level of expertise in recognizing and dealing with a terrorist attack involving a biological or chemical agent is problematic in many hospitals. A recent research report concluded that hospitals need to improve their preparedness for mass casualty incidents. Local officials told us that it has been difficult to get hospitals and medical personnel to participate in local training, planning, and exercises to improve their preparedness. Several federal and local officials reported that there is little excess capacity in the health care system for treating mass casualty patients. Studies have reported that emergency rooms in some areas are routinely filled and unable to accept patients in need of urgent care. According to one local official, the health care system might not be able to handle the aftermath of a disaster because of the problems caused by overcrowding and the lack of excess capacity. Local officials are also concerned about whether the federal government could quickly deliver enough medical teams and resources to help after a biological attack. Agency officials say that federal response teams, such as Disaster Medical Assistance Teams, could be on site within 12 to 24 hours. However, local officials who have deployed with such teams say that the federal assistance probably would not arrive for 24 to 72 hours. Local officials also told us that they were concerned about the time and resources required to prepare and distribute drugs from the National Pharmaceutical Stockpile during an emergency. Partially in response to these concerns, CDC has developed training for state and local officials on using the stockpile and will deploy a small staff with the supplies to assist the local jurisdiction with distribution. We found that federal departments and agencies are participating in a variety of research and preparedness activities that are important steps in improving our readiness. Although federal departments and agencies have engaged in a number of efforts to coordinate these activities on a formal and informal basis, we found that coordination between departments and agencies is fragmented, as illustrated by the many and complex relationships between federal departments and agencies shown in Appendix III. In addition, we found concerns about the preparedness of state and local jurisdictions, including the level of state and local planning for response to terrorist events, inadequacies in the public health infrastructure, a lack of hospital participation in training on terrorism and emergency response planning, capabilities for treating mass casualties, and the timely availability of medical teams and resources in an emergency. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact me at (202) 512-7118. Barbara Chapman, Robert Copeland, Marcia Crosse, Greg Ferrante, Deborah Miller, and Roseanne Price also made key contributions to this statement. We identified the following federal departments and agencies as having responsibilities related to the public health and medical consequences of a bioterrorist attack: USDA - U.S. Department of Agriculture APHIS - Animal and Plant Health Inspection Service ARS - Agricultural Research Service FSIS - Food Safety Inspection Service OCPM - Office of Crisis Planning and Management DOC - Department of Commerce NIST - National Institute of Standards and Technology DOD - Department of Defense DARPA - Defense Advanced Research Projects Agency JTFCS - Joint Task Force for Civil Support National Guard U.S. Army DOE - Department of Energy HHS - Department of Health and Human Services AHRQ - Agency for Healthcare Research and Quality CDC - Centers for Disease Control and Prevention FDA - Food and Drug Administration NIH - National Institutes of Health OEP - Office of Emergency Preparedness DOJ - Department of Justice FBI - Federal Bureau of Investigation OJP - Office of Justice Programs DOT - Department of Transportation USCG - U.S. Coast Guard Treasury - Department of the Treasury USSS - U.S. Secret Service VA - Department of Veterans Affairs EPA - Environmental Protection Agency FEMA - Federal Emergency Management Agency Figure 1, which is based on the framework given in the Terrorism Incident Annex of the Federal Response Plan, shows a sample of the coordination activities by these federal departments and agencies, as they existed prior to the recent creation of the Office of Homeland Security. This figure illustrates the complex relationships among the many federal departments and agencies involved. The following coordination activities are represented on the figure: OMB Oversight of Terrorism Funding. The Office of Management and Budget established a reporting system on the budgeting and expenditure of funds to combat terrorism, with goals to reduce overlap and improve coordination as part of the annual budget cycle. Federal Response Plan - Health and Medical Services Annex. This annex in the Federal Response Plan states that HHS is the primary agency for coordinating federal assistance to supplement state and local resources in response to public health and medical care needs in an emergency, including a bioterrorist attack. Informal Working Group - Equipment Request Review. This group meets as necessary to review equipment requests of state and local jurisdictions to ensure that duplicative funding is not being given for the same activities. Agreement on Tracking Diseases in Animals That Can Be Transmitted to Humans. This group is negotiating an agreement to share information and expertise on tracking diseases that can be transmitted from animals to people and could be used in a bioterrorist attack. National Medical Response Team Caches. These caches form a stockpile of drugs for OEP's National Medical Response Teams. Domestic Preparedness Program. This program was formed in response to the National Defense Authorization Act of Fiscal Year 1997 (P.L. 104-201) and required DOD to enhance the capability of federal, state, and local emergency responders regarding terrorist incidents involving WMDs and high-yield explosives. As of October 1, 2000, DOD and DOJ share responsibilities under this program. Office of National Preparedness - Consequence Management of WMD Attack. In May 2001, the President asked the Director of FEMA to establish this office to coordinate activities of the listed agencies that address consequence management resulting from the use of WMDs. Food Safety Surveillance Systems. These systems are FoodNet and PulseNet, two surveillance systems for identifying and characterizing contaminated food. National Disaster Medical System. This system, a partnership between federal agencies, state and local governments, and the private sector, is intended to ensure that resources are available to provide medical services following a disaster that overwhelms the local health care resources. Collaborative Funding of Smallpox Research. These agencies conduct research on vaccines for smallpox. National Pharmaceutical Stockpile Program. This program maintains repositories of life-saving pharmaceuticals, antidotes, and medical supplies that can be delivered to the site of a biological (or other) attack. National Response Teams. The teams constitute a national planning, policy, and coordinating body to provide guidance before and assistance during an incident. Interagency Group for Equipment Standards. This group develops and maintains a standardized equipment list of essential items for responding to a terrorist WMD attack. (The complete name of this group is the Interagency Board for Equipment Standardization and Interoperability.) Force Packages Response Team. This is a grouping of military units that are designated to respond to an incident. Cooperative Work on Rapid Detection of Biological Agents in Animals, Plants, and Food. This cooperative group is developing a system to improve on-site rapid detection of biological agents in animals, plants, and food. Bioterrorism: Federal Research and Preparedness Activities (GAO-01-915, Sept. 28, 2001). Combating Terrorism: Selected Challenges and Related Recommendations (GAO-01-822, Sept. 20, 2001). Combating Terrorism: Comments on H.R. 525 to Create a President's Council on Domestic Terrorism Preparedness (GAO-01-555T, May 9, 2001). Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement (GAO-01-666T, May 1, 2001). Combating Terrorism: Observations on Options to Improve the Federal Response (GAO-01-660T, Apr. 24, 2001). Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement (GAO-01-463, Mar. 30, 2001). Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy (GAO-01-556T, Mar. 27, 2001). Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response (GAO-01-15, Mar. 20, 2001). Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination (GAO-01-14, Nov. 30, 2000). West Nile Virus Outbreak: Lessons for Public Health Preparedness (GAO/HEHS-00-180, Sept. 11, 2000). Combating Terrorism: Linking Threats to Strategies and Resources (GAO/T-NSIAD-00-218, July 26, 2000). Chemical and Biological Defense: Observations on Nonmedical Chemical and Biological R&D Programs (GAO/T-NSIAD-00-130, Mar. 22, 2000). Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO/NSIAD-00-64, Mar. 21, 2000). Combating Terrorism: Chemical and Biological Medical Supplies Are Poorly Managed (GAO/T-HEHS/AIMD-00-59, Mar. 8, 2000).

This testimony discusses on the efforts of federal agencies to prepare for the consequences of a bioterrorist attack. GAO found that federal agencies are participating in research and preparedness activities, from improving the detection of biological agents to developing a national stockpile of pharmaceuticals to treat victims of disasters. Federal agencies also have several efforts underway to coordinate these activities on a formal and informal basis, such as interagency work groups. Despite these efforts however, coordination between agencies remains fragmented. GAO also found emerging concerns about the preparedness of state and local jurisdictions, including insufficient state and local planning for response to terrorist events, inadequate public health infrastructure, a lack of hospital participation in training on terrorism and emergency response planning, insufficient capabilities for treating mass casualties, and the timely availability of medical teams and resources in an emergency. This testimony summarizes a September 2001 report (GAO-01-915).

In 1990, the Congress enacted the Global Change Research Act. This act, among other things, required the administration to (1) prepare and at least every 3 years revise and submit to the Congress a national global change research plan, including an estimate of federal funding for global change research activities to be conducted under the plan; (2) in each annual budget submission to the Congress, identify the items in each agency's budget that are elements of the United States Global Change Research Program (USGCRP), an interagency long-term climate change science research program; and (3) report annually on climate change "expenditures required" for the USGCRP. In 1992, the United States signed and ratified the United Nations Framework Convention on Climate Change, which was intended to stabilize the buildup of greenhouse gases in the earth's atmosphere, but did not impose binding limits on emissions. In response to the requirements of the 1990 act, the administration reported annually from 1990 through 2004 on funding for climate change science in reports titled Our Changing Planet. From 1990 through 2001, the reports presented detailed science funding data for the USGCRP. Federal climate change science programs were reorganized in 2001 and 2002. In 2001, the Climate Change Research Initiative (CCRI) was created to coordinate short-term climate change research focused on reducing uncertainty, and in 2002, CCSP was created to coordinate and integrate USGCRP and CCRI activities. CCSP is a collaborative interagency program designed to improve the government wide management of climate science and research. Since 2002, CCSP has been responsible for meeting the reporting requirement and has published the Our Changing Planet reports. The most recent report in this series was published in November 2005. The Climate Change Technology Program (CCTP) is a multiagency technology research and development coordinating structure similar to CCSP. Its overall goal is to attain, on a global scale and in partnership with other entities, a technological capability that can provide abundant, clean, secure, and affordable energy and related services needed to encourage and sustain economic growth, while achieving substantial reductions in emissions of greenhouse gases and mitigating the risks of potential climate change. In March 1998, OMB, in response to a congressional requirement for a detailed account of climate change expenditures and obligations, issued a brief report summarizing federal agency programs related to global climate change. OMB produced another climate change expenditures report in March 1999 and, in response to a request at a 1999 hearing, OMB provided climate change funding data for 1993 through 1998 for the hearing record. Each year since 1999, the Congress has included a provision in annual appropriations laws requiring OMB to report in detail all federal agency obligations and expenditures, domestic and international, for climate change programs and activities. As a result of these reporting requirements, OMB annually publishes the Federal Climate Change Expenditures Report to Congress, which presents federal climate change funding for the technology, science, and international assistance categories, and tax expenditures. The climate change activities and associated costs presented in OMB reports must be identified by line item as presented in the President's budget appendix. OMB has interpreted this to mean that the data in the reports must be shown by budget account. For the last 3 years for which we reviewed data, the Congress had required that the administration produce reports for climate change expenditures and obligations for the current fiscal year within 45 days after the submission of the President's budget request for the upcoming fiscal year. OMB's most recent report was released in April 2006. OMB reports include a wide range of federal climate-related programs and activities. Some activities, like scientific research on global environmental change by USGCRP, are explicitly climate change programs, whereas others, such as many technology initiatives, are not solely for climate change purposes. For example, OMB reports included some programs that were started after the United States ratified the Framework Convention in 1992 and were specifically designed to encourage businesses and others to reduce their greenhouse gas emissions, for example, by installing more efficient lighting. OMB reports also included programs that were expanded or initiated in the wake of the 1973 oil embargo to support such activities as energy conservation (to use energy more efficiently), renewable energy (to substitute for fossil fuels), and fossil energy (to make more efficient use of fossil fuels), all of which can help to reduce greenhouse gas emissions, but were not initially developed as climate change programs. Federal climate change funding, as reported by OMB, increased from $2.35 billion in 1993 to $5.09 billion in 2004 (116 percent), or from $3.28 billion to $5.09 billion (55 percent) after adjusting for inflation. Funding also increased for technology, science, and international assistance between 1993 and 2004, as shown in table 1. However, changes in reporting methods have limited the comparability of funding data over time; therefore it is unclear whether funding increased as much as reported by OMB. OMB did not report estimates for existing climate-related tax expenditures during this period, although climate-related tax expenditures amounted to hundreds of millions of dollars in revenue forgone by the federal government in fiscal year 2004. OMB officials told us that changes in reporting methods were due to such reasons as the short amount of time available to prepare the report, the fact that the reporting requirement is not permanent law, but appears each year in their appropriations legislation, and changes in administration policy and priorities. As a result of our recommendations, however, OMB made changes in its report on climate change funding for fiscal year 2007, which was published in April 2006. For example, OMB more clearly labeled data throughout the report and added information on existing tax provisions that can contribute to reducing greenhouse gas emissions. From 1993 through 2004, technology funding increased as a share of total federal climate funding from 36 percent to 56 percent, as reported by OMB. Over this period, technology funding increased from $845 million to $2.87 billion (239 percent), or adjusted for inflation, from $1.18 billion to $2.87 billion (143 percent). For example, funding for energy conservation increased from $346 million to $868 million, and funding for renewable energy increased from $249 million to $352 million. Table 2 presents funding data for selected years for the seven largest accounts, which accounted for 92 percent of technology funding in 2004. We identified three ways that the data on technology funding presented in three of OMB's recent reports may not be comparable to the data presented in previous reports. First, OMB added accounts that were not previously presented. For example, OMB reported that NASA had $152 million in funding for technology-related activities, which included research to reduce emissions associated with aircraft operations in 2003. OMB did not report this account in the technology category in 2002. In addition, OMB included and removed some accounts, without explanation, from reports in years other than 2003. For example, OMB reported combined funding of $195 million in 1999, and $200 million in 2000, for bio- based products and bio-energy at the Departments of Energy and of Agriculture. No funding for these accounts was reported from 1993 through 1998 or from 2001 through 2004. In each of these cases, OMB did not explain whether the new accounts reflected the creation of new programs, a decision to count an existing program for the first time, or a decision to re-classify funding from different categories as technology funding. According to OMB officials, these changes in report structure and content for technology funding, as well as similar changes in science and international assistance funding, were the result of time constraints and other factors. They told us that the short timeline required by the Congress for completing the report (within 45 days of submitting the upcoming year's budget) limited OMB's ability to analyze data submitted by agencies. They said that they must rely on funding estimates quickly developed by agencies in order to produce the report within the specified timeframe, and that the reports are often compilations of agency activities and programs, some of which may or may not have been presented separately in prior years. Moreover, these officials told us that the presentation of data has changed over time for a variety of reasons other than short time limits, including changes in administration priorities and policy, changes in congressional direction, changes to budget and account structures, and attempts to more accurately reflect the reporting requirement as specified in the annual appropriations language. The officials also stated that in each report they ensured consistency for the 3 years covered (prior year, current year, and budget year). Furthermore, OMB officials told us that the presentation of new accounts in the technology category, as well as the international assistance category, was due to the establishment of new programs and the inclusion of existing programs. They told us that the account-by-account display in the reports has been changed over time as the CCSP and the Climate Change Technology Program (CCTP), a multiagency technology research and development coordinating structure similar to the CCSP, have become better defined. Second, OMB reported that it expanded the definitions of some accounts to include more activities but did not specify how the definitions were changed. We found that over 50 percent of the increase in technology funding from 2002 to 2003 was due to increases in two existing DOE accounts: nuclear energy supply and science (fusion, sequestration, and hydrogen). OMB reported funding of $32 million in 2002 and $257 million in 2003, for the nuclear energy supply account and reported funding of $35 million in 2002, and $298 million in 2003, for the science (fusion, sequestration, and hydrogen) account. Although OMB stated in its May 2004 report that 2003 funding data included more activities within certain accounts, including the research and development of nuclear and fusion energy, the report was unclear about whether the funding increases for these two existing accounts were due to the addition of more programs to the accounts or increased funding for existing programs already counted in the accounts. Finally, if new programs were counted in these accounts, OMB did not specify what programs were added and why. OMB officials told us that the definitions of some accounts were changed to include more nuclear programs because, while the prior administration did not consider nuclear programs to be part of its activities relating to climate change, the current administration does consider them to be a key part of the CCTP. Third, OMB did not maintain the distinction that it had made in previous reports between funding for programs whose primary focus is climate change and programs where climate change is not the primary focus. As a result, certain accounts in the technology category were consolidated into larger accounts. From 1993 through 2001, OMB presented funding data as directly or indirectly related to climate change. The former programs are those for which climate change is a primary purpose, such as renewable energy research and development. The latter are programs that have another primary purpose, but which also support climate change goals. For example, grants to help low-income people weatherize their dwellings are intended primarily to reduce heating costs, but may also help reduce the consumption of fossil fuels. OMB did not maintain the distinction between the two kinds of programs for 2002, 2003, and 2004 funding data. For example, OMB presented energy conservation funding of $810 million in 2001, including $619 million in direct research and development funding, and $191 million in indirect funding for weatherization and state energy grants. In contrast, 2002 funding data presented by OMB reflected energy conservation funding of $897 million, including $622 million in research and development, $230 million for weatherization, and $45 million for state energy grants, but did not distinguish between direct and indirect funding. OMB presented energy conservation funding of $880 million in 2003 and $868 million in 2004 as single accounts without any additional detail. OMB officials stated that they had adopted a different approach to reporting climate change funding to reflect the new program structures as the CCSP and CCTP were being established. They stated that the result was, in some cases, an aggregation of activities that may have previously been reported on separate accounts. According to the officials, the 2003 and 2004 data more accurately reflect the range of climate change-related programs as they are now organized. OMB included a crosswalk in its May 2004 report that showed 2003 funding levels as they would have been presented using the methodology of previous reports. While the crosswalk identified funding for accounts that were presented in previous reports, it did not identify new funding reported by OMB or specify whether such funding was the result of counting new programs, a decision to start counting existing programs as climate change-related, or shifts between categories. OMB officials told us that the reporting methodology has changed since the initial reports and that it may be difficult to resolve the differences because of changes in budget and account structure. Finally, they noted that each report has been prepared in response to a one-time requirement and that there has been no requirement for a consistent reporting format from one year to the next or for explaining differences in methodology from one report to another. However, in its fiscal year 2007 report to the Congress, OMB responded to our recommendations by labeling the data more clearly and reporting changes were footnoted. According to both OMB and CCSP, the share of total climate change funding devoted to science decreased from 56 percent in 1993 to 39 percent in 2004, even though science funding increased from $1.31 billion to $1.98 billion (51 percent), or from $1.82 billion to $1.98 billion (9 percent) after adjusting for inflation. For example, according to OMB, funding for NASA on activities such as the satellite measurement of atmospheric ozone concentrations increased from $888 million to $1.26 billion. OMB reported new science funding for 2003 and 2004 to reflect the creation of CCRI. Funding for CCRI increased from $41 million in 2003, the first year funding for CCRI was presented, to $173 million in 2004, and included funding by most of the agencies presented in table 3. We present funding for CCRI as a separate program to illustrate the new organization's role in increasing reported climate change funding. Table 3 presents funding as reported by OMB for the eight largest agencies and programs in the science category, which accounted for 99 percent of the science total for 2004. Science funding data from 1993 through 2004, as reported by OMB and CCSP, were generally comparable, although there were more discrepancies in earlier years than in later years. Science funding totals reported by CCSP from 1993 through 1997 were within 3 percent of the OMB totals for all years except 1996 and 1997. Science funding totals reported by CCSP in 1996 and 1997 were $156 million (9 percent) and $162 million (10 percent) higher than those reported by OMB. Over 90 percent of the difference for those years occurred because CCSP reported greater funding for NASA than OMB reported. CCSP stated in its fiscal year 1998 report that it increased its 1996 and 1997 budget figures to reflect the reclassification of certain programs and activities in some agencies that were not previously included in the science funding total. Total science funding reported by OMB and CCSP from 1998 through 2004 was identical for 4 of the 7 years. The largest difference for the 3 years that were not identical was $8 million in 2001, which represented less than 1 percent of the science funding total reported by OMB for that year. The other differences in total science funding were $3 million in 2002, and $1 million in 1999, and each represented less than 1 percent of the OMB science total for those years. Science funding by agency, as presented by OMB and CCSP from 1993 through 1997, differed in many cases, with the exception of funding for the National Science Foundation (NSF), which was nearly identical over that time period. For example, CCSP reported $143 million more funding for NASA in 1996 than OMB reported, and OMB reported $24.9 million more funding for DOE in 1994 than CCSP reported. The greatest dollar difference related to NASA's funding in 1997. Whereas OMB reported funding of $1.22 billion, CCSP reported funding of $1.37 billion--$151 million, or 12 percent more than the OMB amount. The greatest percentage difference related to the Department of the Interior's funding in 1993. Whereas OMB reported funding of $22 million, CCSP reported funding of $37.7 million--$15.7 million, or 71 percent more than reported by OMB. Further, from 1993 through 1997, OMB did not report science funding by some agencies that were reported by CCSP. For example, CCSP reported that DOD's funding ranged from $5.7 million to $6.6 million from 1993 through 1995, and that the Tennessee Valley Authority received funding of $1 million or less per year from 1993 through 1997, but OMB did not report any such funding. OMB officials told us that data used for the 1993 to 1997 science funding comparison with CCSP were collected too long ago to be able to identify the differences. However, they stated that the data from early years were produced in a very short period for use in testimony or questions for the record. According to OMB, this quick turnaround did not allow time for a thorough consistency check with other data sources. From 1998 through 2004, OMB and CCSP data on funding by agency were nearly identical. Both OMB and CCSP reported science funding for nine agencies over the entire 7-year period, for a total of 63 agency funding amounts. Of these, 52, or 83 percent, matched exactly. Of the 11 differences, there was one difference of $8 million, one of $2 million, and nine of $1 million or less. The greatest difference from 1998 through 2004 was $8 million in funding for the Department of Commerce in 2001, which was 9 percent of the Department of Commerce total, or less than 1 percent of total science funding as reported by OMB for that year. The director of CCSP told us that changes to reports, such as the creation and deletion of different categorization methods, were made because CCSP is changing towards a goals-oriented budget, and that categorization methods changed as the program evolved. The director also said that future reports will explicitly present budget data as they were reported in prior reports to retain continuity, even if new methods are introduced. Another CCSP official told us that CCSP now works with OMB to ensure that consistent funding information is presented in Our Changing Planet reports and OMB reports, and that, beginning with the fiscal year 2006 report (which was published in late 2005), CCSP would attempt to explain when and why changes are made to reporting methods. In its 2006 fiscal year report, CCSP did explain changes to its reporting. From 1993 through 2004, international assistance funding decreased from 9 percent to 5 percent of total federal funding on climate change, as reported by OMB. Over the same time period, international assistance funding increased from $201 million to $252 million (an increase of 25 percent), but after adjusting for inflation, decreased from $280 million to $252 million (a decrease of 10 percent). For example, reported funding for the Department of the Treasury to help developing countries invest in energy efficiency, renewable energy, and the development of clean energy technologies, such as fuel cells, increased from zero in 1993 to $32 million in 2004. Table 4 presents funding as reported by OMB for the three largest accounts in the international assistance category. International assistance funding reported by OMB was generally comparable over time, although some new accounts were added without explanation. In its reports, OMB did not provide an explanation of whether such new accounts reflected the creation of new programs or a decision to count existing programs as climate change-related for the first time. OMB officials told us that the presentation of new accounts in the international assistance category was due to the establishment of new programs and the inclusion of existing programs. They told us that the account-by-account display in the reports has been changed over time as climate change programs have become better defined. Although not required to provide information on tax expenditures related to climate change, OMB reported certain information related to climate- related tax expenditures for each year. Specifically, it listed proposed climate-related tax expenditures appearing in the President's budget, but it did not report revenue loss estimates for existing climate-related tax expenditures from 1993 through 2004. Based on the Department of the Treasury's tax expenditure list published in the 2006 budget, we identified four existing tax expenditures that have purposes similar to programs reported by OMB in its climate change reports. In 2004, estimated revenue losses amounted to hundreds of millions of dollars for the following tax expenditures: $330 million in revenue losses was estimated for new technology tax credits to reduce the cost of generating electricity from renewable resources. A credit of 10 percent was available for investment in solar and geothermal energy facilities. In addition, a credit of 1.5 cents was available per kilowatt hour of electricity produced from renewable resources such as biomass, poultry waste, and wind facilities. $100 million in revenue losses was estimated for excluded interest on energy facility bonds to reduce the cost of investing in certain hydroelectric and solid waste disposal facilities. The interest earned on state and local bonds used to finance the construction of certain hydroelectric generating facilities was tax exempt. Some solid waste disposal facilities that produced electricity also qualified for this exemption. $100 million in revenue losses was estimated for excluded income from conservation subsidies provided by public utilities to reduce the cost of purchasing energy-efficient technologies. Residential utility customers could exclude from their taxable income energy conservation subsidies provided by public utilities. Customers could exclude subsidies used for installing or modifying certain equipment that reduced energy consumption or improved the management of energy demand. $70 million in revenue losses was estimated for tax incentives for the purchase of clean fueled vehicles to reduce automobile emissions. A tax credit of 10 percent, not to exceed $4,000, was available to purchasers of electric vehicles. Purchasers of vehicles powered by compressed natural gas, hydrogen, alcohol, and other clean fuels could deduct up to $50,000 of the vehicle purchase costs from their taxable income, depending upon the weight and cost of the vehicle. Similarly, owners of refueling properties could deduct up to $100,000 for the purchase of re-fueling equipment for clean fueled vehicles. OMB officials said that they consistently reported proposed tax expenditures where a key purpose was specifically to reduce greenhouse gas emissions. They also stated that they did not include existing tax expenditures that may have greenhouse gas benefits but were enacted for other purposes, and that the Congress had provided no guidance to suggest additional tax expenditure data should be included in the annual reports. OMB's decision criteria for determining which tax expenditures to include differed in two key respects from its criteria for determining which accounts to include. First, OMB presented funding for existing as well as proposed accounts, but presented information only on proposed, but not existing, tax expenditures. Second, OMB presented funding for programs where a key purpose was specifically to reduce greenhouse gas emissions, as well as for programs that may have greenhouse gas benefits but were enacted for other purposes. However, OMB presented information only on proposed tax expenditures where a key purpose was specifically to reduce greenhouse gas emissions. In response to GAO's recommendation to report existing climate-related tax expenditures, OMB's fiscal year 2007 report to the Congress includes existing tax expenditures that contribute to reducing global warming. OMB reported that 12 of the 14 agencies that received funding for climate change programs in 2004 received more funding in that year than they had in 1993. However, it is unclear whether funding changed as much as reported by OMB because unexplained modifications in the reports' contents limit the comparability of agencies' funding data. From 1993 through 2004, climate change funding for DOE increased more than any other agency, from $963 million to $2.52 billion, for an increase of $1.56 billion (162 percent). Adjusted for inflation, such funding increased from $1.34 billion to $2.52 billion, for an increase of $1.18 billion (88 percent). The second largest increase in agency funding was for NASA, which received a $660 million (74 percent) increase in funding over the same time period. NASA's funding increased $310 million (25 percent) over this period after adjusting for inflation. The funding increases for these two agencies accounted for 81 percent of the reported total increase in federal climate change funding from 1993 through 2004. Conversely, USAID experienced the largest decrease in funding--from $200 million in 1993 to $195 million in 2004 (3 percent), or, in inflation-adjusted terms, from $279 million to $195 million (30 percent). Table 5 shows OMB's reports on climate change funding by agency for selected years. Unexplained changes in the content of OMB reports make it difficult to determine whether funding changed as much as was reported by OMB. Because agency funding totals are composed of individual accounts, the changes in the reports' contents discussed earlier, such as the unexplained addition of accounts to the technology category, limit the comparability of agencies' funding data over time. For example, OMB reported Army, Navy, Air Force, and Defense-wide funding totaling $83 million in 2003, and $51 million in 2004, in accounts titled Research, Development, Test, and Evaluation, but did not report these accounts for prior years. OMB did not explain whether these accounts reflected the creation of new programs or a decision to count existing programs for the first time. OMB officials told us that agencies can be included in reports for the first time when new initiatives or programs are started, such as the CCTP. In some cases, those initiatives or programs are made up of entirely new funding but in other cases they may be additions on top of a small amount of base funding. These officials told us that agencies sometimes include data that were not previously reported when they requested funding for those initiatives, but they assured us that the data are reported consistently for the 3 years presented in each report. The federal budget process is complex, and there are numerous steps that culminate in the outlay of federal funds. Among the key steps in this process are the following, as defined by OMB: Budget authority means the authority provided in law to incur financial obligations that will result in outlays. Obligations are binding agreements that will result in outlays, immediately or in the future. Expenditures are payments to liquidate an obligation. The Congress, in the Congressional Budget and Impoundment Control Act of 1974, as amended, has defined outlays as being the expenditures and net lending of funds under budget authority. In simplified terms, budget authority precedes obligations, which precede outlays in the process of spending federal funds. As noted above, since 1999, the Congress has required the President to submit a report each year to the Senate and House Committees on Appropriations describing in detail all federal agency obligations and expenditures, domestic and international, for climate change programs and activities. In response, OMB had annually published the Federal Climate Change Expenditures Report to Congress which presented budget authority information in summary data tables instead of obligations and expenditures, as the title of the report and the table titles suggested. The only indication that the table presented budget authority information, rather than expenditures, was a parenthetical statement to that effect in a significantly smaller font. OMB officials told us that the term "expenditures" was used in the report title and text because that was the term used most often in the legislative language. They also said that the reports presented data in terms of budget authority because OMB hads always interpreted the bill and report language to request the budget authority levels for each activity in a particular year. They stated further that, from a technical budget standpoint, expenditures are usually synonymous with outlays, and that one way to think of budget authority is that it is the level of expenditures (over a period of 1 or more years) that is made available in a particular appropriations bill. OMB viewed this as an appropriate interpretation of the congressional requirements since the committees on appropriations work with budget authority and not outlays. Moreover, OMB told us that these committees had never objected to its interpretation of "obligations and expenditures" as budget authority and that OMB had always identified the data provided in the table as budget authority. In our August 2005 report, we expressed several concerns with OMB's approach. First, OMB's approach of reporting budget authority did not comply with the language of the annual legal requirements to report on climate change "obligations and expenditures." Second, in reviewing the legislative history of these reporting requirements, we found no support for OMB's interpretation that when the Congress called for "obligations and expenditures" information, it actually meant "budget authority" information. Third, OMB's interpretation was not consistent with its own Circular A-11, which defines budget authority as stated above, not actual obligations and expenditures. Nonetheless, we recognize that it is not possible for OMB to meet the most recent reporting requirements because it must provide a report on climate change obligations and expenditures for the current fiscal year within 45 days of submitting the President's budget for the following fiscal year (which must be submitted the first Monday of February). For example, the President submitted the fiscal year 2006 budget on February 7, 2005, so OMB's report on fiscal year 2005 climate change expenditures and obligations had to be submitted in March 2005--approximately halfway through the 2005 fiscal year. However, complete expenditures data are available only after the end of each fiscal year. Thus, OMB could not meet both the timing requirement and report all actual expenditures and obligations in fiscal year 2005. CCSP has also reported budget authority data in its Our Changing Planet reports. As noted above, CCSP, or its predecessor organization, initially was required to report annually on certain climate change "amounts spent," "amounts expected to be spent," and "amounts requested," but this reporting requirement was terminated in 2000. Currently, CCSP is responsible for reporting information relating to the federal budget and federal funding for climate change science, not climate change expenditure information. Since 2000, CCSP has fulfilled these reporting requirements by providing budget authority information in its Our Changing Planet reports. In conclusion, we found that the lack of clarity in OMB's and CCSP's reports made it difficult to comprehensively understand the federal government's climate change expenditures. A better understanding of these expenditures is needed before it is possible to assess CCSP's and other federal agencies' progress towards their climate change goals. We therefore made seven recommendations to OMB and three to CCSP to clarify how they present climate change funding information. OMB agreed with most of our recommendations and has also implemented several of them. CCSP agreed with all of our recommendations and has implemented our recommendation about explaining changes in report content or format. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any question you or other Members of the Committee may have. For further information regarding this testimony, please contact me at (202) 512-3841. John Healey, Anne K. Johnson, and Vincent P. Price made key contributions to this testimony. Richard Johnson, Carol Kolarik, Carol Herrnstadt Shulman, and Anne Stevens also made important contributions. 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 Congress has required annual reports on federal climate change spending. The Office of Management and Budget (OMB) reports funding for: technology (to reduce greenhouse gas emissions), science (to better understand the climate), international assistance (to help developing countries), and tax expenditures (to encourage emissions reduction). The Climate Change Science Program (CCSP), which coordinates many agencies' activities, also reports on science funding. This testimony is based on GAO's August 2005 report Climate Change: Federal Reports on Climate Change Should Be Clearer and More Complete (GAO-05-461). GAO examined federal climate change funding for 1993 through 2004, including (1) how total funding and funding by category changed and whether funding data are comparable over time and (2) how funding by individual agencies changed and whether funding data are comparable over time. According to OMB, from 1993 to 2004, federal funding for climate change increased from $3.3 billion to $5.1 billion (55 percent) after adjusting for inflation. During this period, reported inflation-adjusted funding increased for technology and science, but decreased for international assistance. However, it is unclear whether funding changed as much as reported because changes in the format and content of OMB and CCSP reports make it difficult to compare funding data over time. For example, over time, OMB expanded the definitions of some accounts to include more activities, but did not specify how it changed the definitions. OMB officials stated that it is not required to follow a consistent reporting format from year to year. Further, CCSP's science funding reports were difficult to compare over time because CCSP introduced new methods for categorizing funding without explaining how they related to previous methods. The Director of CCSP said that its reports changed as the program evolved. These and other limitations make it difficult to determine actual changes in climate change funding. Similarly, OMB reported that 12 of the 14 agencies that funded climate change programs in 2004 increased such funding between 1993 and 2004, but unexplained changes in the reports' contents limit the comparability of data on funding by agency. For example, reported funding for the Department of Energy (DOE), the agency with the most reported climate-related funding in 2004, increased from $1.34 billion to $2.52 billion (88 percent) after adjusting for inflation. DOE and the National Aeronautics and Space Administration accounted for 81 percent of the reported increase in funding from 1993 through 2004. However, because agency funding totals are composed of individual accounts, changes in the reports' contents, such as the unexplained addition of accounts to the technology category, make it difficult to compare agencies' funding data over time and, therefore, to determine if this is a real or a definitional increase. Furthermore, GAO found that OMB reported funding for certain agencies in some years but not in others, without explanation. OMB told GAO that it relied on agency budget offices to submit accurate data. These data and reporting limitations make determining agencies' actual levels of climate change funding difficult.

We found that the agencies responsible for rebuilding Iraq generally complied with applicable requirements governing competition when awarding new reconstruction contracts in fiscal year 2003. While the Competition in Contracting Act of 1984 requires that federal contracts be awarded on the basis of full and open competition, the law and implementing regulations recognize that there may be circumstances under which full and open competition would be impracticable, such as when contracts need to be awarded quickly to respond to unforeseen and urgent needs or when there is only one source for the required product or service. In such cases, agencies are given authority by law to award contracts under limited competition or on a sole-source basis, provided that the proposed actions are appropriately justified and approved. We reviewed 14 new contracts that were awarded in fiscal year 2003 using other than full and open competition: a total of 5 sole-source contracts awarded by the Army Corps of Engineers, the Army Field Support Command, and USAID; and 9 limited competition contracts awarded by the Department of State, the Army Contracting Agency, and USAID. For 13 of these new contracts, agency officials adequately justified their decisions and complied with the statutory and regulatory competition requirements. For example, USAID officials awarded seven contracts under limited competition and two sole-source contracts citing an exception to the competition requirements that was provided for under the Federal Property and Administrative Services Act. USIAD concluded that the use of standard competitive procedures would not enable it to put in place foreign aid programs and activities for Iraq in a timely manner. We found that USAID's justification and approval documentation supporting the award of these contracts complied with applicable requirements. As I will shortly discuss in more detail, we also found that the Army Corps of Engineers properly justified the award of a sole-source contract to restore Iraq's oil infrastructure. In one case, however, the Department of State justified and approved the use of limited competition under a unique authority that, in our opinion, may not be a recognized exception to the competition requirements. At the same time, State took steps to obtain some competition by inviting offers from four firms. In addition, it is likely that State could have justified and approved its limited competition under recognized exceptions to the competition requirements. With respect to issuing a task order under an existing contract, the competition law does not require competition beyond that obtained for the initial contract award, provided the task order does not increase the scope of the work, period of performance, or maximum value of the contract under which the order is issued. The scope, period, or maximum value may be increased only by modification of the contract, and competitive procedures are required to be used for any such increase unless an authorized exception applies. As we noted in our report released yesterday, determining whether work is within the scope of an existing task order contract is primarily an issue of contract interpretation and judgment by the contracting officer. We found several compliance problems when agencies issued task orders under existing contracts. Specifically, of the 11 task orders we reviewed, 7 were, in whole or part, not within scope. For example, the Defense Contracting Command-Washington (DCC-W) improperly used a General Services Administration (GSA) schedule contract to issue two task orders to the Science Applications International Corporation with a combined value of over $107 million for work that was outside the scope of the schedule contract. One order involved developing a news media capability--including radio and television programming and broadcasting--in Iraq. The other required the contractor to recruit people identified by DOD as subject matter experts, enter into subcontracts with them, and provide them with travel and logistical support within the United States and Iraq. The GSA schedule contract, however, was for management, organizational, and business improvement services for federal agencies. In our view, the statements of work for both task orders were outside the scope of the schedule contract. Another example of an agency issuing a task order that was outside the scope of the underlying contract involved the Army Field Support Command's $1.9 million task order for contingency planning for the Iraqi oil infrastructure mission under the LOGCAP contract with Kellogg Brown & Root. This task order, issued in November 2002, required the contractor to develop a plan to repair and restore Iraq's oil infrastructure should Iraqi forces damage or destroy it. Because the contractor was knowledgeable about the U.S. Central Command's planning for conducting military operations, DOD officials determined that the contractor was uniquely positioned to develop the contingency support plan. DOD also determined that developing the contingency plan was within the scope of the overall LOGCAP contract. We have concluded, however, that preparation of the contingency support plan for this specific mission (i.e. restoring Iraq's oil infrastructure) was beyond the scope of the contract. Specifically, we read the LOGCAP statement of work as providing for contingency planning only when the execution of the mission involved is within the scope of the contract. In this regard, all parties--including GAO and DOD--agree that repairing Iraq's oil infrastructure would not have been within the scope of the LOGCAP contract. Consequently, we concluded that planning the oil infrastructure restoration was also not within the scope of the contract. The Army Field Support Command should have prepared a written justification to authorize the work without competition. In light of the exigent circumstances, such a justification was likely possible but needed to be made and documented to comply with the law and protect the taxpayer's interests. DOD planners believed early on that issuance of this task order would result in Kellogg Brown & Root being uniquely qualified to initially execute the plan for restoring the Iraqi oil infrastructure, the so-called "RIO contract." Subsequently, the RIO contract was awarded in March 2003 to Kellogg Brown & Root. The contracting officer's written justification for the sole-source contract outlined the rationale for the decision. The justification was approved by the Army's senior procurement executive, as required. We reviewed the justification and approval documentation and determined that it generally complied with applicable legal standards. We made several recommendations to the Secretary of the Army to review out-of-scope task orders to address outstanding issues and take appropriate actions, as necessary. DOD generally concurred with the recommendations and noted that it was in the process of taking corrective actions. DOD also agreed with our recommendation that the Secretary of Defense evaluate the lessons learned in Iraq and develop a strategy for assuring that adequate acquisition staff and other resources can be made available in a timely manner. I will now turn to discussing our ongoing work on DOD's use of global logistics support contracts. As I previously noted, we looked at four such contracts, which have been used by all the military services to provide a wide array of services, including operating dining facilities and providing housing, in more than half a dozen countries, including Iraq, Kuwait, and Afghanistan. In total, the estimated value of the work under the current contracts is $12 billion, including $5.6 billion for work in Iraq through May 2004. Before summarizing our preliminary findings, let me first make an overall observation about the vital services that these types of contracts provide. The contractors and the military services have, for the most part, worked together to meet military commanders' needs, sometimes in very hazardous or difficult circumstances. For example, the LOGCAP contract is providing life and logistics support to more than 165,000 soldiers and civilians under difficult security circumstances in Iraq, Afghanistan, Kuwait, and Djibouti, and customers told us they are generally pleased with the service the contractor is providing. The AFCAP contractor is providing air traffic management at air bases throughout central Asia, supplementing scarce Air Force assets and providing needed rest for Air Force service members who also perform this function. Using the CONCAP contract, the Navy has constructed detainee facilities (including a maximum security prison) at Guantanamo Bay on time and within budget. Projects at Guantanamo have increased the safety of both the detainees and the U.S. forces guarding them and resulted in real savings in reduced personnel tempo. Finally, the BSC continues to provide a myriad of high quality services to troops in Kosovo and Bosnia, and the customer works with the contractor to identify costs savings. Within this overall context, we found mixed results in each of the four areas we reviewed--planning, oversight, efficiency and personnel--with variations occurring among the four contracts and among the various commands using them. Our report, which will be issued later this year, will make a number of recommendations to address the shortcomings we identified in these areas. In assessing DOD's planning, we found that some customers planned quite well for the use of the contracts, following service guidance and including the contractor early in planning. For example, in planning for Operation Iraqi Freedom, U.S. Army, Europe, was tasked with supporting the anticipated movement of troops through Turkey into Iraq, and our review of that planning showed that the command followed applicable Army guidance to good effect. In October 2002, the command brought contractor personnel to its headquarters in Europe to help plan and develop the statement of work. According to a briefing provided by U.S. Army, Europe, contractor planners brought considerable knowledge of contractor capabilities, limitations, and operations, and their involvement early in the planning efforts increased understanding of the requirements and capabilities, facilitated communication regarding the statement of work, and enhanced mission completion. Conversely, we found that the use of LOGCAP in Kuwait and Iraq was not adequately planned, nor was it planned in accordance with applicable Army guidance. Given the lack of early and adequate planning and contractor involvement, two key ingredients needed to maximize LOGCAP support and minimize cost--a comprehensive statement of work and early contractor involvement--were missing. Specifically: A plan to support the troops in Iraq was developed in May 2003, but was not comprehensive because the contractor was not involved in the early planning and it did not include all of the dining facilities, troop housing, and other services that the Army has since added to the task order. According to an official from the 101st Airborne Division, there was a lack of detailed planning for the use of LOGCAP at the theater and division levels for the sustainment phase of the operation. He added that Army planners should develop a closer working relationship with the divisions and the contractor. Task orders were frequently revised. These revisions generated a significant amount of rework for the contractor and the contracting officers. Additionally, time spent reviewing revisions to the task orders is time that is not available for other oversight activities. While operational considerations may have driven some of these changes, we believe others were more likely to have resulted from ineffective planning. For example, the task order supporting the troops in Iraq was revised 7 times in less than 1 year. Frequent revisions have not been limited to this task order. Task order 27, which provides support to U.S troops in Kuwait (estimated value of $426 million as of May 2004), was changed 18 times between September 2002 and December 2003, including 5 changes in one month, some on consecutive days. As of May 11, 2004, the contracting office, DCMA, and the contractor had processed more than 176 modifications to LOGCAP task orders. In some cases, we found that contract oversight processes were in place and functioning well. For example, the Defense Contract Management Agency (DCMA) had principal oversight responsibility for the LOGCAP and AFCAP contracts and the BSC, and DCMA generally provided good overall contract oversight, although we found some examples where it could have improved its performance. For example: Effective oversight of the diverse functions performed under the contracts requires government personnel with knowledge and expertise in these specific areas. DCMA contract administrators are contracting professionals, but many have limited knowledge of field operations. In these situations, DCMA normally uses contracting officer's technical representatives. Contracting officer's technical representatives are customers who have been designated by their units and appointed and trained by the administrative contracting officer. They provide technical oversight of the contractor's performance. We found that DCMA had not appointed these representatives at all major sites in Iraq. Officials at the 101st Airborne Division, for example, told us that they had no contracting officer's technical representatives during their year in Iraq, even though the division used LOGCAP services extensively. For task orders executed in southwest Asia, the AFCAP procuring contracting officer delegated the property administration responsibility to DCMA administrative contracting officers. However, contract administrators in southwest Asia did not ensure that the contractor had established and maintained a property control system to track items acquired under the contract. In addition, DCMA contracting officers in southwest Asia did not have a system in place to document what the contractor was procuring in support of AFCAP task orders and what was being turned over to the Air Force. As a result, as of April 2004, neither DCMA nor the Air Force could account for approximately $2 million worth of tools and construction equipment purchased through the AFCAP contract. An important element of contract administration is the definitizing of task orders, that is, reaching agreement with the contractor on the terms, specifications, or price of services to be delivered. All of the contracts included in our review were cost-plus award fee contracts. These contracts allow the contractor to be reimbursed for reasonable, allowable, and allocable costs incurred to the extent prescribed by the contract and provide financial incentives based on performance. Cost-plus award fee contracts allow the government to evaluate a contractor's performance according to specified criteria and to grant an award amount within designated parameters. Award fees can serve as a valuable tool to help control program risk and encourage excellence in contract performance. To reap the advantages that cost-plus award fee contracts offer, the government must implement an effective award fee process. Any delays in definitizing task orders, however, make cost-control incentives in these award fee contracts less effective as a cost control tool since there is less work remaining to be accomplished and therefore less costs to be controlled by the contractor. While we found that AFCAP and BSC task orders were definitized quickly, and CONCAP task orders do not require definitization since the terms, specifications, and price are agreed to before work begins, we also found that many LOGCAP task orders remain undefinitized for months, and sometimes more than a year, after they were due to be completed and after billions of dollars of work had been completed. Because task orders have not been definitized, LOGCAP contracting personnel have not conducted an award fee board. I would like to note, however, that this condition is not limited to the LOGCAP contract. We stated in our report released yesterday that the Army Corps of Engineers has yet to definitize its March 2003 contract to rebuild Iraq's oil infrastructure or one of its contracts to rebuild Iraq's electrical infrastructure and recommended that the undefinitized contracts and task orders be definitized as soon as possible. DOD agreed with this recommendation and identified a number of steps being taken to do so. We again found mixed results in evaluating the attention to economy and efficiency in the use of contracts. In some cases, we saw military commands actively looking for ways to save money in the contracts. For example, U.S. Army, Europe, reported savings of approximately $200 million under the BSC by reducing labor costs, by reducing services, and by closing or downsizing camps that were no longer needed. The $200 million is almost 10 percent of the current contract ceiling price of $2.098 billion. In addition to these savings, U.S. Army, Europe, routinely sends in teams of auditors from its internal review group to review practices and to make recommendations to improve economy and efficiency. In others, however, most notably the LOGCAP contract in Iraq and Kuwait, we saw very little concern for cost considerations. It was not until December 2003, for example, that the Army instructed commands to look for ways to economize on the use of this contract. Similarly, we found that the Air Force did not always select the most economical and efficient method to obtain services. It used the AFCAP contract to supply commodities for its heavy construction squadrons, although use of the contract to procure and deliver commodity supplies required that the Air Force pay the contractor's costs plus an additional award fee. Air Force officials said that they used AFCAP because not enough contracting and finance personnel were deployed to buy materials quickly or in large quantities. AFCAP program managers have recognized that the use of a cost-plus award fee contract to buy commodities may not be the most cost-effective method and said that the next version of the contract may allow for either firm-fixed prices or cost-plus fixed fee procurements for commodity purchases. We found that shortages of personnel have also made contract oversight difficult. For example, while DCMA has deployed contracting officers to several countries throughout southwest and central Asia and the Balkans to provide on-site contract administration, DCMA officials believe that additional resources are needed to effectively support the LOGCAP and AFCAP contracts. Administrative contracting officers in Iraq, for example, have been overwhelmed with their duties as a result of the expanding scope of some of the task orders. Additionally, some Army and Air Force personnel with oversight responsibilities did not receive the training necessary to effectively accomplish their jobs. Finally, we found that military units receiving services from the contracts generally lacked a comprehensive understanding of their contract roles and responsibilities. For example, commanders did not understand the part they played in establishing task order requirements, nor did they fully understand the level of support required by the contractors. In conclusion, Mr. Chairman, the United States, along with its coalition partners and various international organizations and donors, has undertaken an enormously complex, costly, and challenging effort to rebuild Iraq in an unstable security environment. At the early stages of these efforts, agency procurement officials were confronted with little advance warning on which to plan and execute competitive procurement actions, an urgent need to begin reconstruction efforts quickly, and uncertainty as to the magnitude and term of work required. Their actions, in large part, reflected proper use of the flexibilities provided under procurement laws and regulations to award new contracts using other than full and open competitive procedures. With respect to several task orders issued under existing contracts, however, some agency officials overstepped the latitude provided by competition laws by ordering work outside the scope of the underlying contracts. This work should have been separately competed, or justified and approved at the required official level for performance by the existing contractor. Importantly, given the war in Iraq, the urgent need for reconstruction efforts, and the latitude allowed by the competition law, these task orders reasonably could have been supported by justifications for other than full and open competition. Logistics support contracts have developed into a useful tool for the military services to quickly obtain needed support for troops deployed to trouble spots around the world. Because of the nature of these contracts, however--that is, cost-plus award fee contracts--they require significant government oversight to make sure they are meeting needs in the most economic and efficient way possible in each circumstance. While the military services are learning how to use these contracts well, in many cases the services are still not achieving the most cost-effective performance and are not adequately learning and applying the lessons of previous deployments. Because of the military's continuing and growing reliance on these contracting vehicles, it is important that improvements be made and that oversight be strengthened. Mr. Chairman and Members of the committee, this concludes my statement. I will be happy to answer any question you may have. For further information, please contact Neal P. Curtin at (757) 552-8111 or [email protected] or William T. Woods at (202) 512-4841 or [email protected]. Individuals making key contributions to this statement include Robert Ackley, Ridge Bowman, Carole Coffey, Laura G. Czohara, Gary Delaney, Timothy J. DiNapoli, George M. Duncan, Glenn D. Furbish, C. David Groves, John Heere, Chad Holmes, Oscar W. Mardis, Kenneth E. Patton, Ron Salo, Steven Sternlieb, Matthew W. Ullengren, John Van Schaik, Adam Vodraska, Cheryl A. Weissman, and Tim Wilson. 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 General Accounting Office (GAO) discussed some of the work the it is undertaking to address various operations and rebuilding efforts in Iraq. Specifically, GAO has a body of ongoing work looking at a range of issues involving Iraq, including Iraq's transitional administrative law, efforts to restore essential services to the Iraqi people, and the effectiveness of logistics activities during Operation Iraqi Freedom, among others. Importantly, given the challenging security environment in Iraq and the various other accountability organizations involved in the oversight process, it is attempting to coordinate its engagement planning and execution with other organizations as appropriate. In this testimony it discussed (1) its report (GAO-04-605) that was released yesterday on the contract award procedures for contracts awarded in fiscal year 2003 to help rebuild Iraq and (2) its preliminary findings on the military's use of global logistics support contracts. These support contracts have emerged as important tools in providing deployed military services with a wide range of logistics services. With regard to the award of fiscal year 2003 Iraq reconstruction contracts, GAO found that agencies generally complied with applicable laws and regulations governing competition when using sole-source or limited competition approaches to award new contracts. However, they did not always do so when issuing task orders under existing contracts. In several instances, GAO found that contracting officers issued task orders for work that was not within the scope of the underlying contracts and which should have been awarded using competitive procedures or, because of the exigent circumstances involved, supported by a justification for other than full and open competition in accordance with legal requirements. With regard to DOD's use of global logistics support contracts, GAO found mixed results in each of the four areas it reviewed: planning, oversight, efficiency, and personnel. GAO also found that while some military commands actively looked for ways to save money, others exhibited little concern for cost considerations. Finally, shortages in personnel trained in contract management and oversight is also an issue that needs to be addressed. The report will make a number of recommendations to address these shortcomings.

Since fiscal year 2000, DOD has significantly increased the number of major defense acquisition programs and its overall investment in them. During this same time period, acquisition outcomes have not improved. For example, in last year's assessment of selected DOD weapon programs, we found that total acquisition costs for the fiscal year 2007 portfolio of major defense acquisition programs increased 26 percent and development costs increased by 40 percent from first estimates--both of which are higher than the corresponding increases in DOD's fiscal year 2000 portfolio. In most cases, the programs we assessed failed to deliver capabilities when promised--often forcing warfighters to spend additional funds on maintaining legacy systems. Our analysis showed that current programs experienced, on average, a 21-month delay in delivering initial capabilities to the warfighter, a 5-month increase over fiscal year 2000 programs as shown in table 1. Continued cost growth results in less funding being available for other DOD priorities and programs, while continued failure to deliver weapon systems on time delays providing critical capabilities to the warfighter. We are currently updating our analysis and intend to issue our assessment of DOD's current portfolio in March. Several underlying systemic problems at the strategic level and at the program level continue to contribute to poor weapon system program outcomes. At the strategic level, DOD does not prioritize weapon system investments and the department's processes for matching warfighter needs with resources are fragmented and broken. DOD largely continues to define warfighting needs and make investment decisions on a service- by-service basis and assess these requirements and their funding implications under separate decision-making processes. Ultimately, the process produces more demand for new programs than available resources can support, promoting an unhealthy competition for funds that encourages programs to pursue overly ambitious capabilities, develop unrealistically low cost estimates and optimistic schedules, and to suppress bad news. Similarly, DOD's funding process does little to prevent programs from going forward with unreliable cost estimates and lengthy development cycles, which is not a sound basis for allocating resources and ensuring program stability. Invariably, DOD and the Congress end up continually shifting funds to and from programs--undermining well- performing programs to pay for poorly performing ones. At the program level, programs are started without knowing what resources will truly be needed and are managed with lower levels of product knowledge at critical junctures than expected under best practices standards. For example, in our March 2008 assessment, we found that only 12 percent of the 41 programs we reviewed had matured all critical technologies at the start of the development effort. None of the 26 programs we reviewed that were at or had passed their production decisions had obtained adequate levels of knowledge. In the absence of such knowledge, managers rely heavily on assumptions about system requirements, technology, and design maturity, which are consistently too optimistic. These gaps are largely the result of a lack of a disciplined systems engineering analysis prior to beginning system development, as well as DOD's tendency to allow new requirements to be added well into the acquisition cycle. This exposes programs to significant and unnecessary technology, design, and production risks, and ultimately damaging cost growth and schedule delays. With high-levels of uncertainty about technologies, design, and requirements, program cost estimates and related funding needs are often understated, effectively setting programs up for failure. When DOD consistently allows unsound, unexecutable programs to pass through the requirements, funding, and acquisition processes, accountability suffers. Program managers cannot be held accountable when the programs they are handed already have a low probability of success. Moreover, program managers are not empowered to make go or no-go decisions, have little control over funding, cannot veto new requirements, have little authority over staffing, and are frequently changed during a program's development. Consequently, DOD officials are rarely held accountable for these poor outcomes, and the acquisition environment does not provide the appropriate incentives for contractors to stay within cost and schedule targets, making them strong enablers of the status quo. With regard to improving its acquisition of weapon systems, DOD has made changes consistent with the knowledge-based approach to weapons development that GAO has recommended in its work. In December 2008, DOD revised DOD Instruction 5000.02, which provides procedures for managing major defense acquisition programs in ways that aim to provide key department leaders with the knowledge needed to make informed decisions before a program starts and to maintain discipline once it begins. For example, the revised instruction includes procedures for the completion of key systems engineering activities before the start of the systems development, a requirement for more prototyping early in programs, and the establishment of review boards to monitor weapon system configuration changes. We have previously raised concerns, however, with DOD's implementation of guidance on weapon systems acquisition. At the same time, DOD must begin making better choices that reflect joint capability needs and match requirements with resources. Given the nation's ongoing financial and economic crisis, DOD's investment decisions cannot continue to be driven by the military services that propose programs that overpromise capabilities and underestimate costs simply to start and sustain development programs. DOD has increasingly relied on contractors to support its missions and operations, due in part to such factors as the reductions in DOD's civilian and military personnel following the collapse of the Soviet Union, the increasing complexity of weapons systems, and more recently, the increased demands related to the global war on terrorism, such as the need for large numbers of Arabic speakers. DOD officials have stated that without a significant increase in its civilian and military workforce, the department is likely to continue to rely on contractors both in the United States and overseas in support of future deployments. For example, in October 2008, the then-Under Secretary of the Army stated that the Army has more requirements than available force structure and that much of the Army's mission would be impossible without the support provided by contractors. Similarly, the Deputy Under Secretary of Defense for Logistics and Materiel Readiness testified in 2008 that the structure of the U.S. military has been adapted to an environment in which contractors are an indispensable part of the force. In that regard, DOD estimated that more than 230,000 contractor personnel were supporting operations in Iraq and Afghanistan as of October 2008. This reliance on contractors to support DOD's current mission was not the result of a strategic or deliberate process but resulted from thousands of individual decisions to use contractors to provide specific capabilities. As the Secretary of Defense testified last month, DOD has not thought holistically or coherently about the department's use of contractors particularly when it comes to combat environments. DOD has long- standing guidance for determining the appropriate mix of manpower-- military, civilian, and contractors--necessary to accomplish the department's mission. This guidance, however, is primarily focused on individual decisions whether to use contractors to provide specific capabilities and not the overarching question of what the appropriate role of contractors should be. In October 2008, the Under Secretary of the Army acknowledged that DOD has not made much progress in assessing the appropriate role of contractors on the battlefield and stated that any serious or purposeful discussion about the future size of the Army must include the role of contractors. We have increasingly called for DOD to be more strategic in how it uses contractors. For example, in November 2006, we reported that DOD lacked a proactive strategic approach to managing services acquisitions and needed to determine, among other things, areas of specific risks that were inherent when acquiring services and that should be managed with greater attention. Indeed, we have called on DOD to conduct a fundamental reexamination of when and under what circumstances DOD should use contractors as opposed to civil servants or military personnel. Similarly, in January 2008, we testified that DOD needs to determine the appropriate balance between contractors and military personnel in deployed locations. Without a fundamental understanding of its reliance on contractors and the capabilities they should provide, DOD's ability to mitigate the risks associated with using contractors is limited. Our previous work has highlighted several examples of the risks inherent to using contractors, including ethics concerns, diminished institutional capacity, potentially greater costs, and mission risks. Examples include: Certain contractor employees often work side-by-side with government employees, performing such tasks as studying alternative ways to acquire desired capabilities, developing contract requirements, and advising or assisting on source selection, budget planning, and award-fee determinations. Contractor employees are generally not subject, however, to the same laws and regulations that are designed to prevent conflicts of interests among federal employees. The Army Contracting Agency's Contracting Center of Excellence relied on contractors to support acquisition and contracting decisions, which raised concerns about the Army's efforts to mitigate the risks of conflicts of interest or losing control over decision making. Similarly, for 11 Air Force space program offices, contractors accounted for 64 percent of cost- estimating personnel, raising questions from the cost-estimating community about whether numbers and qualifications of government personnel are sufficient to provide oversight of and insight into contractor cost estimates. One underlying premise of using contractors is that doing so will be more cost-effective than using government personnel. This may not always be the case. In one instance, we found that the Army Contracting Agency's Contracting Center of Excellence was paying up to 27 percent more for contractor-provided contract specialists than it would have for similarly graded government employees. Reliance on contractors can create mission risks when contractors are supporting deployed forces. For example, because contractors cannot be ordered to serve in contingency environments, the possibility that they will not deploy can create risks that the mission they support may not be effectively carried out. Further, if commanders are unaware of their reliance on contractors they may not realize that substantial numbers of military personnel may be redirected from their primary responsibilities to provide force protection or assume functions anticipated to be performed by contractors and commanders therefore may not plan accordingly. The Chairman of the Joint Chiefs of Staff has directed the Joint Staff to examine the use of DOD service contracts (contractors) in Iraq and Afghanistan in order to better understand the range and depth of contractor capabilities necessary to support the Joint Force. In assessing the appropriate role of contractors, it is important to recognize that contractors can provide important benefits such as flexibility to fulfill immediate needs. In some cases, DOD's specific needs may be too limited, too technical or have other characteristics that do not make it cost-effective for DOD to develop an organic capability. For example, we reported in 2008 that the repair of battle-damaged Stryker vehicles was contracted out because DOD did not have people with the specific welding skills required to perform this type of repair. In other cases, contractors are used because they are cheaper. For example, we reported in 2007 that the Army's decision to contract for the operation and maintenance of the firing range at Fort Hood resulted in an estimated $6 million savings. In addition, both DOD and others have stated the department has limited capacity to pick up some or all of the capabilities currently provided by contractors. For example, DOD has reported that replacing the 13,000 armed private security contractors currently supporting the department in Iraq and Afghanistan, would require at least an additional 40,000 military personnel, given DOD's current rotation policies. Once the decision has been made to use contractors to support DOD's missions or operations, it is essential that DOD clearly defines its requirements and employs sound business practices, such as using appropriate contracting vehicles and the collection and distribution of critical information. Our work, however, on DOD's use of time-and- materials contracts and undefinitized contract actions--two contracting practices that are often used when requirements are uncertain or changing--identified weaknesses in DOD's management and oversight, increasing the government's risk. Examples include: In June 2007, we found numerous issues with DOD's use of time-and- materials contracts. DOD reported that it obligated nearly $10 billion under time-and-materials contracts in fiscal year 2005, acquiring, among other services, professional, administrative, and management support services. Some specific examples of the services DOD acquired included subject matter experts in the intelligence field and systems engineering support. These contracts are appropriate when specific circumstances justify the risks, but our findings indicate that they are often used as a default for a variety of reasons--ease, speed, and flexibility when requirements or funding are uncertain. Time-and-materials contracts are considered high risk for the government because they provide no positive profit incentive to the contractor for cost control or labor efficiency and their use is supposed to be limited to cases where no other contract type is suitable. We found, however, that DOD underreported its use of time-and- materials contracts; frequently did not justify why time-and-materials contracts were the only contract type suitable for the procurement; made few attempts to convert follow-on work to less risky contract types; and was inconsistent in the rigor with which contract monitoring occurred. In that same month, we reported that DOD needed to improve its management and oversight of undefinitized contract actions (UCAs), under which DOD can authorize contractors to begin work and incur costs before reaching a final agreement on contract terms and conditions, including price. The contractor has little incentive to control costs during this period, creating a potential for wasted taxpayer dollars. We found that DOD did not know the full extent it used UCAs because the government's federal procurement data system did not track UCAs awarded under certain contract actions, such as task or delivery order contracts. Moreover, we found that (1) the use of some UCAs could have been avoided with better acquisition planning; (2) DOD frequently did not definitize the UCAs within the required time frames thereby increasing the cost risk to the government; and (3) contracting officers were not documenting the basis for the profit or fee negotiated, as required. We called on DOD to strengthen management controls and oversight of UCAs to reduce the risk of DOD paying unnecessary costs and potentially excessive profit rates. In a separate report, issued in July 2007, we found that DOD's failure to adhere to key contracting principles on a multibillion dollar contract to restore Iraq's oil infrastructure increased the government's risk. In this case, we found that the lack of timely negotiations on task orders that were issued as UCAs contributed significantly to DOD's decision to pay nearly all of the $221 million in costs questioned by the Defense Contract Audit Agency (DCAA). All 10 task orders we reviewed were negotiated more than 180 days after the work commenced, and the contractor had incurred almost all its costs at the time of negotiations. The negotiation delays were in part caused by changing requirements, funding challenges, and inadequate contractor proposals. Our previous work has also identified cost and oversight risks associated with inconsistent or limited collection and distribution of information. Examples include: Our 2008 review of several Army service contracts found that the Army's oversight of some of the contracts was inadequate due in part to contracting offices not maintaining complete contract files documenting contract administration and oversight actions taken, in accordance with DOD policy and guidance. As a result, incoming contract administration personnel did not know whether the contractors were meeting their contract requirements effectively and efficiently and therefore were limited in their ability to make informed decisions related to award fees, which can run into the millions of dollars. In addition, several GAO reports and testimonies have noted that despite years of experience using contractors to support deployed forces in the Balkans, Southwest Asia, Iraq, and Afghanistan, DOD has made few efforts to systematically collect and share lessons learned regarding the oversight and management of contractors supporting deployed forces. As a result, many of the management and oversight problems we identified in earlier operations have recurred in current operations. Moreover, without the sharing of lessons learned, substantial increases in forces in Afghanistan are likely to exacerbate those contract management and oversight challenges already present in Afghanistan. Properly managing the acquisition of services requires a workforce with the right skills and capabilities. In that regard, there are a number of individuals and organizations involved in the acquisition process, including contracting officers who award contracts, as well as those individuals who define requirements, receive or benefit from the services provided, and oversee contractor performance, including DCAA and the Defense Contract Management Agency (DCMA). We and others have raised questions whether DOD has a sufficient number of trained acquisition and contract oversight personnel to meet its needs. For example, the increased volume of contracting is far in excess of the growth in DOD contract personnel. Between fiscal years 2001 and 2008, DOD obligations on contracts when measured in real terms, have more than doubled to over $387 billion in total, and to more than $200 billion just for services. Over the same time period, however, DOD reports its contracting career field grew by only about 1 percent as shown in figure 1. In 2008, DOD completed an assessment of its contracting workforce, in which more than 87 percent of its contracting workforce participated. DOD reports that this assessment provides a foundation for understanding the skills and capabilities its workforce currently and is in the process of determining how to close those gaps, such as through training or hiring additional personnel. DOD, however, lacks information on the competencies and skills needed in its entire workforce, particularly those who provide oversight or play other key roles in the acquisition process. We are currently assessing DOD's ability to determine the sufficiency of its acquisition workforce and its efforts to improve its workforce management and oversight and will be issuing a report in the spring. Having too few contract oversight personnel presents unique difficulties at deployed locations given the more demanding operational environment compared to the United States because of an increased operational tempo, security considerations, and other factors. We and others have found significant deficiencies in DOD's oversight of contractors because of an inadequate number of trained personnel to carry out these duties. Examples include: We noted in January and September 2008 that the lack of qualified personnel hindered oversight of contracts to maintain military equipment in Kuwait and provide linguist services in Iraq and Afghanistan. We found that without adequate levels of qualified oversight personnel, DOD's ability to perform the various tasks needed to monitor contractor performance may be hindered. For example, we found that poor contractor performance can result in the warfighter not receiving equipment in a timely manner. In addition, the Army Inspector General reported in October 2007 that shortages of contracting officers, quality assurance personnel, and technically proficient contracting officer's representatives were noticeable at all levels, while the 2007 Commission on Army Acquisition and Program Management in Expeditionary Operations (the Gansler Commission) noted that shortages in personnel contributed to fraud, waste, and abuse in theatre. If left unaddressed, the problems posed by personnel shortages in Iraq and elsewhere are likely to become more significant in Afghanistan as we increase the number of forces and the contractors who support them there. An additional, long-standing challenge hindering management and oversight of contractors supporting deployed forces is the lack of training for military commanders and oversight personnel. As we testified in 2008, limited or no pre-deployment training on the use of contractor support can cause a variety of problems for military commanders in a deployed location, such as being unable to adequately plan for the use of those contractors and confusion regarding the military commanders' roles and responsibilities in managing and overseeing contractors. Lack of training also affects the ability of contract oversight personnel to perform their duties. The customer (e.g., a military unit) for contractor-provided services at deployed locations is responsible for evaluating the contractor's performance and ensuring that contractor-provided services are used in an economical and efficient manner. Often this involves the use of contracting officer's representatives--individuals typically drawn from units receiving contractor-provided services, who are not normally contracting specialists, and for whom contract monitoring is an additional duty. We have repeatedly found that contract oversight personnel received little or no pre-deployment training on their roles and responsibilities in monitoring contractor performance, hindering the ability of those individuals to effectively manage and oversee contractors. While performing oversight is often the responsibility of military service contracting officers or their representatives, DCAA and DCMA play key roles in the oversight process. DCAA provides a critical internal control function on behalf of DOD and other federal agencies by performing a range of contract audit services, including reviewing contractors' cost accounting systems, conducting audits of contractor cost proposals and payment invoices, and providing contract advisory services to help assure that the government pays fair and reasonable prices. To be an effective control, DCAA must perform reliable audits. In a report we issued in July 2008, however, we identified a serious noncompliance with generally accepted government auditing standards at three field audit offices responsible for billions of dollars of contracting. For example, we found that workpapers did not support reported opinions and sufficient audit work was not performed to support audit opinions and conclusions. As a result, DCAA cannot assure that these audits provided reliable information to support sound contract management business decisions or that contract payments are not vulnerable to significant amounts of fraud, waste, abuse, and mismanagement. The DCAA Director subsequently acknowledged agencywide problems and initiated a number of corrective actions. In addition, DOD included DCAA's failure to meet professional standards as a material internal control weakness in its fiscal year 2008 agency financial report. We are currently assessing DCAA's corrective actions and anticipate issuing a report later this spring. Similarly, DCMA provides oversight at more than 900 contractor facilities in the United States and across the world, providing contract administration services such as monitoring contractors' performance and management systems to ensure that cost, performance, and delivery schedules comply with the terms and conditions of the contracts. DCMA has also assumed additional responsibility for overseeing service contracts in Iraq, Afghanistan, and other deployed locations, including contracts that provide logistical support and private security services. In a July 2008 report, we noted that DCMA had increased staffing in these locations only by shifting resources from other locations and had asked the services to provide additional staff since DCMA did not have the resources to meet the requirement. As a result, it is uncertain whether DCMA has the resources to meet its commitments at home and abroad. GAO's body of work on contract management and the use of contractors to support deployed forces has resulted in numerous recommendations over the last several years. In response, DOD has issued guidance to address contracting weaknesses and promote the use of sound business arrangements. For example, in response to congressional direction and GAO recommendations, DOD has established a framework for reviewing major services acquisitions; promulgated regulations to better manage its use of contracting arrangements that can pose additional risks for the government, including time-and-materials contracts and undefinitized contracting actions; and has efforts under way to identify and improve the skills and capabilities of its workforce. For example, in response to recommendations from the Gansler Commission, the Army has proposed increasing its acquisition workforce by over 2,000 personnel. However, the Army also acknowledged that this process will take at least 3 to 5 years to complete. DOD has also taken specific steps to address contingency contracting issues. GAO has made numerous recommendations over the past 10 years aimed at improving DOD's management and oversight of contractors supporting deployed forces, including the need for (1) DOD-wide guidance on how to manage contractors that support deployed forces, (2) improved training for military commanders and contract oversight personnel, and (3) a focal point within DOD dedicated to leading DOD's efforts to improve the management and oversight of contractors supporting deployed forces. As we reported in November 2008, DOD has been developing, revising, and finalizing new joint policies and guidance on the department's use of contractors to support deployed forces (which DOD now refers to as operational contract support). Examples include: In October 2008, DOD finalized Joint Publication 4-10, "Operational Contract Support," which establishes doctrine and provides standardized guidance for planning, conducting, and assessing operational contract support integration and contractor management functions in support of joint operations. DOD is revising DOD Instruction 3020.41, "Program Management for the Preparation and Execution of Acquisitions for Contingency Operations," which strengthens the department's joint policies and guidance on program management, including the oversight of contractor personnel supporting a contingency operation. DOD has also taken steps to improve the training of military commanders and contract oversight personnel. As we reported in November 2008, the Deputy Secretary of Defense issued a policy memorandum in August 2008 directing the appointment of trained contracting officer's representatives prior to the award of contracts. U.S. Joint Forces Command is developing two training programs for non-acquisition personnel to provide information necessary to operate effectively on contingency contracting matters and work with contractors on the battlefield. In addition, the Army has a number of training programs available that provide information on contract management and oversight to operational field commanders and their staffs. The Army is also providing similar training to units as they prepare to deploy, and DOD, the Army, and the Marine Corps have begun to incorporate contractors and contract operations in mission rehearsal exercises. In October 2006, the Deputy Under Secretary of Defense for Logistics and Materiel Readiness established the office of the Assistant Deputy Under Secretary of Defense (Program Support) to act as the focal point for DOD's efforts to improve the management and oversight of contractors supporting deployed forces. This office has taken several steps to help formalize and coordinate efforts to address issues related to contractor support to deployed forces. For example, the office took a leading role in establishing a community of practice for operational contract support-- comprising subject matter experts from the Office of the Secretary of Defense, the Joint Staff, and the services--that may be called upon to work on a specific task or project. Additionally, the office helped establish a Council of Colonels, which serves as a "gatekeeper" for initiatives, issues, or concepts, as well as a Joint Policy Development General Officer Steering Committee, which includes senior commissioned officers or civilians designated by the services. The committee's objective is to guide the development of the Office of the Secretary of Defense, Joint Staff, and service policy, doctrine, and procedures to adequately reflect situational and legislative changes as they occur within operational contract support. DOD has recognized it faces challenges with weapons systems acquisition and contract management and the department has taken steps to address these challenges, including those outlined in this testimony. The current economic crisis presents an opportunity and an imperative for DOD to act forcefully to implement new procedures and processes in a sustained, consistent, and effective manner across the department. In this context, to overcome these issues, the department needs to take additional actions. These include: In the near-term, DOD needs to ensure that existing and future guidance is fully complied with and implemented. Doing so will require continued, sustained commitment by senior DOD leadership to translate policy into practice and to hold decision makers accountable. At the same time, the department and its components have taken or plan to take actions to further address weapons systems acquisition and contract management challenges. However, many of these actions, such as the Army's efforts to increase its acquisition workforce, will not be fully implemented for several years and progress will need to be closely monitored to ensure the steps undertaken result in their intended outcomes. Risk is inherent when relying on contractors to support DOD missions. At the departmentwide level, DOD has yet to conduct the type of fundamental reexamination of its reliance on contractors that we called for in 2008. Without understanding the depth and breadth of contractor support, the department will be unable to determine if it has the appropriate mix of military personnel, DOD civilians, and contractors. As a result, DOD may not be totally aware of the risks it faces and will therefore be unable to mitigate those risks in the most cost-effective and efficient manner. The implementation of existing and emerging policy, monitoring of the department's actions, and the comprehensive assessment of what should and should not be contracted for are not easy tasks, but they are essential if DOD is to place itself in a better position to deliver goods and services to the warfighters. Moreover, with an expected increase of forces in Afghanistan, the urgency for action is heightened to help the department avoid the same risks of fraud, waste, and abuse it has experienced using contractors in support of Operation Iraqi Freedom. Mr. Chairman, this concludes my prepared statement. I will be pleased to answer any questions you or members of the subcommittee may have at this time. For further information about this testimony, please contact Janet St. Laurent, Managing Director, Defense Capabilities and Management on (202) 512-4402 or [email protected] or Katherine V. Schinasi, Managing Director, Acquisition and Sourcing Management on (202) 512-4841 or [email protected]. Other key contributors to this testimony include Karyn Angulo, Carole Coffey, Grace Coleman, Timothy DiNapoli, Gayle Fischer, Dayna Foster, Angie Nichols-Friedman, John Hutton, Julia Kennon, James A. Reynolds, William M. Solis, and Karen Thornton. Modernizing the Outdated U.S. Financial Regulatory System (New) Protecting Public Health through Enhanced Oversight of Medical Products (New) High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Defense Acquisitions: Fundamental Changes Are Needed to Improve Weapon Program Outcomes. GAO-08-1159T. Washington, D.C.: September 25, 2008. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-08-467SP. Washington, D.C.: March 31, 2008. Defense Acquisitions: A Knowledge-Based Funding Approach Could Improve Major Weapon System Program Outcomes. GAO-08-619. Washington, D.C.: July 2, 2008. Best Practices: Increased Focus on Requirements and Oversight Needed to Improve DOD's Acquisition Environment and Weapon System Quality. GAO-08-294. Washington, D.C.: February 1, 2008. Space Acquisitions: Actions Needed to Expand and Sustain Use of Best Practices. GAO-07-730T. Washington, D.C.: April 19, 2007. Defense Acquisitions: DOD's Requirements Determination Process Has Not Been Effective in Prioritizing Joint Capabilities. GAO-08-1060. Washington, D.C.: September 25, 2008. Tactical Aircraft: DOD Needs a Joint and Integrated Investment Strategy. GAO-07-415. Washington, D.C.: April 2, 2007. Best Practices: An Integrated Portfolio Management Approach to Weapon System Investments Could Improve DOD's Acquisition Outcomes. GAO-07-388. Washington, D.C.: March 30, 2007. Defense Acquisitions: Cost to Deliver Zumwalt-Class Destroyers Likely to Exceed Budget. GAO-08-804. Washington, D.C.: July 31, 2008. Defense Acquisitions: Progress Made in Fielding Missile Defense, but Program Is Short of Meeting Goals. GAO-08-448. Washington, D.C.: March 14, 2008. Joint Strike Fighter: Recent Decisions by DOD Add to Program Risks. GAO-08-388. Washington, D.C.: March 11, 2008. Defense Acquisitions: 2009 Is a Critical Juncture for the Army's Future Combat System. GAO-08-408. Washington, D.C.: March 7, 2008. DCAA Audits: Allegations That Certain Audits at Three Locations Did Not Meet Professional Standards Were Substantiated. GAO-08-857. Washington, D.C.: July 22, 2008. Defense Contracting: Post-Government Employment of Former DOD Officials Needs Greater Transparency. GAO-08-485. Washington, D.C.: May 21, 2008. Defense Contracting: Army Case Study Delineates Concerns with Use of Contractors as Contract Specialists. GAO-08-360. Washington, D.C.: March 26, 2008. Defense Contracting: Additional Personal Conflict of Interest Safeguards Needed for Certain DOD Contractor Employees. GAO-08-169. Washington, D.C.: March 7, 2008. Defense Contract Management: DOD's Lack of Adherence to Key Contracting Principles on Iraq Oil Contract Put Government Interests at Risk. GAO-07-839. Washington, D.C.: July 31, 2007. Defense Contracting: Improved Insight and Controls Needed over DOD's Time-and-Materials Contracts. GAO-07-273. Washington, D.C.: June 29, 2007. Defense Contracting: Use of Undefinitized Contract Actions Understated and Definitization Time Frames Often Not Met. GAO-07-559. Washington, D.C.: June 19, 2007. Defense Acquisitions: Improved Management and Oversight Needed to Better Control DOD's Acquisition of Services. GAO-07-832T, Washington, D.C.: May 10, 2007 Defense Acquisitions: Tailored Approach Needed to Improve Service Acquisition Outcomes. GAO-07-20. Washington, D.C.: November 9, 2006. Contract Management: DOD Developed Draft Guidance for Operational Contract Support but Has Not Met All Legislative Requirements. GAO-09-114R. Washington, D.C.: November 20, 2008. Contingency Contracting: DOD, State, and USAID Contracts and Contractor Personnel in Iraq and Afghanistan. GAO-09-19. Washington, D.C.: October 1, 2008. Military Operations: DOD Needs to Address Contract Oversight and Quality Assurance Issues for Contracts Used to Support Contingency Operations. GAO-08-1087. Washington, D.C: September 26, 2008. Rebuilding Iraq: DOD and State Department Have Improved Oversight and Coordination of Private Security Contractors in Iraq, but Further Actions Are Needed to Sustain Improvements. GAO-08-966. Washington, D.C.: July 31, 2008. Defense Management: DOD Needs to Reexamine Its Extensive Reliance on Contractors and Continue to Improve Management and Oversight. GAO-08-572T. Washington, D.C.: March 11, 2008. Military Operations: Implementation of Existing Guidance and Other Actions Needed to Improve DOD's Oversight and Management of Contractors in Future Operations. GAO-08-436T. Washington, D.C.: January 24, 2008. Defense Acquisitions: DOD's Increased Reliance on Service Contractors Exacerbates Longstanding Challenges. GAO-08-621T. Washington, D.C.: January 23, 2008. Defense Logistics: The Army Needs to Implement an Effective Management and Oversight Plan for the Equipment Maintenance Contract in Kuwait. GAO-08-316R. Washington, D.C.: January 23, 2008. Military Operations: High-Level DOD Action Needed to Address Long- standing Problems with Management and Oversight of Contractors Supporting Deployed Forces. GAO-07-145. Washington, D.C.: December 18, 2006. Rebuilding Iraq: Continued Progress Requires Overcoming Contract Management Challenges. GAO-06-1130T. Washington, D.C.: September 28, 2006. Military Operations: Background Screenings of Contractor Employees Supporting Deployed Forces May Lack Critical Information, but U.S. Forces Take Steps to Mitigate the Risks Contractors May Pose. GAO-06-999R. Washington, D.C.: September 22, 2006. Rebuilding Iraq: Actions Still Needed to Improve the Use of Private Security Providers. GAO-06-865T. Washington, D.C.: June 13, 2006. 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.

Today's testimony addresses the challenges DOD faces to improve the efficiency and effectiveness of its weapon systems acquisition and contract management. GAO has designated both areas as high risk areas since the early 1990s. DOD's major weapon systems programs continue to take longer to develop, cost more, and deliver fewer quantities and capabilities than originally planned. DOD also continues to face long-standing challenges managing service contracts and contractors. For example, the oversight of service contracts has been recognized as a material weakness in the Army. The current fiscal environment combined with the current operational demands elevates the need to improve weapon systems acquisition and contract management. DOD has taken steps in response to recommendations GAO has made over the past decade. Taken collectively, these actions reflect the commitment of DOD senior leadership. However, to fully address these challenges the department needs to (1) translate policy into practice, (2) ensure steps undertaken result in intended outcomes, and (3) conduct a fundamental reexamination of its reliance on contractors. In preparing this testimony, GAO drew from issued reports, containing statements of scope and methodology used, and testimonies. Several underlying systemic problems at the strategic level and at the program level continue to contribute to poor weapon systems acquisition. The total acquisition cost of DOD's 2007 portfolio of major programs has grown by 26 percent over initial estimates. At the strategic level, DOD does not prioritize weapon system investments, and its processes for matching warfighter needs with resources are fragmented and broken. DOD largely continues to define warfighting needs and make investment decisions on a service-by-service basis and assesses these requirements and their funding implications under separate decision-making processes. Invariably, DOD and the Congress end up continually shifting funds to and from programs--undermining well-performing programs to pay for poorly performing ones. At the program level, weapon system programs are initiated without sufficient knowledge about requirements, technology, and design maturity. Instead, managers rely on assumptions that are consistently too optimistic, exposing programs to significant and unnecessary risks and ultimately cost growth and schedule delays. In December 2008, DOD revised its guidance to improve its acquisition of major weapon systems, consistent with recommendations GAO has made. We have previously raised concerns, however, with DOD's implementation of guidance on weapon systems acquisition. In fiscal year 2008, DOD obligated about $200 billion for contractor-provided services, more than doubling the amount it spent a decade ago when measured in real terms. GAO's previous work has highlighted several examples of the risks inherent in using contractors, including ethics concerns, diminished institutional capacity, potentially greater costs, and mission risks. Further, the lack of well-defined requirements, difficulties employing sound business practices, and workforce and training issues hinder efforts to effectively manage and oversee contracts and contractors. These factors ultimately contribute to higher costs, schedule delays, unmet goals, and negative operational impacts. These issues take on a heightened significance in Iraq and Afghanistan, where DOD estimated that more than 200,000 contractor personnel were engaged as of July 2008, exceeding the number of uniformed military personnel there. As of October 2008, the number of contractor personnel in both countries had increased to over 230,000. DOD has taken several steps in response to GAO's recommendations aimed at improving management and oversight of contractors. These include issuing policy and guidance addressing contract management, identifying skill gaps in DOD's acquisition workforce, improving training for military commanders and contract oversight personnel, and creating a focal point within the department for issues associated with the use of contractors to support deployed forces. DOD, however, has not conducted a comprehensive assessment to determine the appropriate mix of military, civilian, and contractor personnel.

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 authorizes DHS to, among other things, assign employees to any consular post to review individual visa applications and provide expert advice and training to consular officers regarding specific security threats related to the visa process. A subsequent September 2003 Memorandum of Understanding between State and DHS further outlines the responsibilities of each agency with respect to visa issuance. DHS is responsible for establishing visa policy, reviewing implementation of the policy, and providing additional direction. State manages the visa process, as well as the consular corps and its functions at 211 visa-issuing posts overseas. 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 an applicant's name against the Consular Lookout and Support System-- State's name-check database that posts use to access critical information for visa adjudication. In some cases, a consular officer may determine the need for a Security Advisory Opinion, which is a response from Washington on whether to issue a visa to the applicant. Depending on a post's applicant pool and the number of visa applications that a post receives, each stage of the visa process varies in length. According to consular officials, posts that consistently have wait times for visa interview appointments of 30 days or longer may have a resource or management problem. To monitor posts' workload, State requires that posts report, on a weekly basis, the wait times for applicant interviews. As of March 2006, State's data showed that between September 2005 and February 2006, 97 posts reported maximum wait times of 30 or more days in at least one month; at 20 posts, the reported wait times were in excess of 30 days for the entire 6-month period. Moreover, in February 2006, nine posts reported wait times in excess of 90 days (see table 1). According to the Assistant Secretary of State for Consular Affairs, managing consular workload is a major issue for the department, particularly at posts in India and China where volume is expected to continue to increase. In February 2004, we reported that officials at some of the posts we visited in India and China indicated they did not have enough space and staffing resources to handle interview demands and the new visa requirements. According to consular officers, during the 2003 summer months, the wait for visa interviews was as long as 12 weeks in Chennai, India. In China, applicants at one post were facing waits of about 5 to 6 weeks during our September 2003 visit due to an imbalance between demand for visas and the number of consular officers available to interview applicants and staff to answer phones. Although these posts have undertaken initiatives to shorten the wait times, such as using temporary duty help and instituting longer interviewing hours, delays for visa interviews remain an ongoing concern. For example, the U.S. embassy in New Delhi instituted a new appointment system in October 2005, which resulted in immediate, additional interviewing capacity at post, according to consular officials. However, reported wait times in New Delhi had risen above 90 days by February 2006 (see table 2). At posts in China, Consular Affairs indicated that improvements in facilities and staff increases have helped to lessen wait times for interviews. However, consular officials have acknowledged that demand for visas at posts in China is likely to rise and continue to affect wait times in the future. Table 3 shows recent wait times for visa appointments in China. Although we have not attempted to measure the impact of the time it takes to adjudicate a visa, we reported in February 2004 that consular officials and representatives of several higher education, scientific, and governmental organizations reported that visa delays could be detrimental to the scientific interests of the United States. Although these officials and representatives provided numerous individual examples of the consequences of visa delays, they were unable to measure the total impact of such lengthy waits. For example, in September 2003, Department of Energy officials in Moscow explained that former Soviet Union scientists have found it extremely difficult to travel to the United States to participate in U.S. government-sponsored conferences and exchanges that are critical to nonproliferation efforts. Business groups have also expressed concern about the impact of visa delays. For example, officials from the American Chamber of Commerce and other industry executives have testified numerous times in recent years about the problem of delayed entry for foreign nationals traveling to the United States for legitimate business purposes. In addition, on June 2, 2004, a coalition of eight industry associations published a study estimating that U.S. companies suffered losses totaling $30 billion from July 2002 to March 2004 due to delays and denials in the processing of business visas. Beijing's Deputy Chief of Mission and consular officials at the embassy and consulates in China also stated that visa delays could have a negative impact on student and scholar exchanges. Visa delays are a longstanding problem. However, since September 2001, several factors have exacerbated wait times for visas. First, changes to visa policies and procedures have resulted in additional workload for consular officers. Second, while not reaching pre-2001 levels, visa application volume has increased in recent years. Third, many posts face facility constraints, which limit the extent to which posts can increase visa processing. Finally, staffing shortfalls also affect the length of time that applicants must wait for a visa. Since the September 11 attacks, Congress, State, and DHS have initiated a series of changes to policies and procedures designed to enhance border security. These changes have added to the complexity of consular officers' workload and, in turn, exacerbated State's resource constraints. These changes include the following: Consular officers must interview virtually all visa applicants; prior to August 2003, they could routinely waive interviews. Since October 2004, consular officers are required to scan foreign nationals' right and left index fingers and clear the fingerprints through the DHS Automated Biometric Identification System before an applicant can receive a visa. Some responsibilities previously delegated to Foreign Service nationals and consular associates have been transferred to consular officers. For example, consular associates are no longer authorized to adjudicate visas. As previously mentioned, some applicants have faced additional delays due to various special security checks, or Security Advisory Opinions. For example, foreign science students and scholars, who may pose a threat to our national security by illegally transferring sensitive technology, may be subject to security checks known as Visas Mantis. In the spring of 2003, it took an average of 67 days for Visas Mantis checks to be processed and for State to notify consular posts of the results. Since then, State and other agencies have taken actions which have reduced delays to about 15 days for these checks. In addition, on July 13, 2005, the Secretary of Homeland Security announced that the U.S. government had adopted a 10-print standard for biometric collection for visas. In January 2006, the director of the U.S. Visitor and Immigrant Status Indicator Technology program testified that moving to a 10-fingerscan standard from a 2-print standard would allow the United States to be able to identify visa applicants and visitors with even greater accuracy. In February 2006, State reported that it plans to complete pilot testing and procurement of the 10-print equipment to ensure that all visa-issuing posts have collection capability by the end of fiscal year 2007. Requiring applicants to submit 10-prints could add more time to the applicant's interview and potentially delay visa processing. To help mitigate the adverse impact of these policy and procedural changes on wait times, State has taken actions to help maintain the right balance between promoting security and facilitating travel. For example, while we have not assessed the impact of these actions, all overseas posts have established procedures to expedite the processing of business visas and are working closely with local American Chambers of Commerce in more than 100 countries to expedite the visa process for bona fide business travelers. In July 2005, State also established a Business Visa Center to facilitate visa application procedures for U.S. businesses in conjunction with upcoming travel or events. Regarding foreign students, in February 2006, State announced that it has extended the length of time foreign students may be issued student visas, which will allow some students to apply up to 120 days before their academic program start date (as compared to 90 days under previous regulations). According to State, U.S. embassies and consulates also have established special, expedited visa interviews for prospective foreign students. While not returning to levels prior to the September 11 attacks, visa issuance rates increased in fiscal years 2004 and 2005, according to State's data (see fig. 1). Should application volume continue to increase, State has acknowledged that additional management actions will be necessary to ensure that visa applications are processed in a timely manner. In the future, we believe that increased global trade and economic growth will likely result in increased demand for visas, particularly in certain countries. Embassy facilities at some posts limit the number of visa applications that are processed each day and make it difficult to keep up with visa demand. In our September 2005 report, we noted that many visa chiefs we interviewed reported problems with their facilities. For example, at 14 of the 25 posts covered in our survey, consular officials rated their workspace as below average, and 40 percent reported that applicants' waiting rooms were below average. In addition, due to overcrowded waiting rooms at four of the eight posts we visited, we observed visa applicants waiting for their interviews outside or in adjacent hallways. Moreover, a limited number of security guards and screening devices, as well as limited physical space, often create bottlenecks at the facilities' security checkpoints. In March 2006, we observed visa facilities in Paris, France, and noted that there are insufficient adjudicating windows to meet visa demand. A senior consular official acknowledged that many consular facilities are located in run-down buildings with insufficient adjudicating windows and waiting rooms. In fiscal year 2003, Congress directed the Overseas Building Operations Bureau to begin a 3-year Consular Workspace Improvement Initiative to improve the overall working environment for consular officers. In fiscal years 2003 and 2004, State obligated $10.2 million to 79 workspace improvement projects at 68 posts. However, according to a senior consular official, these funds are being used to provide temporary solutions at posts that may require a new embassy as part of State's multibillion-dollar embassy construction program. It may take years before some posts' facilities needs are fully addressed. To have sufficient resources to manage the demand for visas and minimize the time applicants must wait, State may need to consider establishing new visa-issuing posts. Indeed, in its 2005 inspection of the Embassy in New Delhi, for example, the Office of the Inspector General stated that State should establish a permanent consulate in Hyderabad, India, by no later than 2008 in light of the need for expanded visa processing facilities due to increased application volume. In March 2006, the President announced that the United States would open a new consulate; however, it is unclear when this may happen. In September 2005, we reported that State faced staffing shortfalls in consular positions--a key factor affecting the effectiveness of the visa process and the length of time applicants must wait for visas. As of April 30, 2005, we found that 26 percent of midlevel consular positions were either vacant or filled by an entry-level officer. In addition, almost three- quarters of the vacant positions were at the FS-03 level--midlevel officers who generally supervise entry-level staff. Consular officials attribute this shortfall 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. We believe experienced supervision at visa-issuing posts is important to avoiding visa delays. For example, experienced officers may provide guidance to entry- level officers on ways to expedite visa processing, including advising staff on when special security checks are required. During our February 2005 visits to Riyadh and Jeddah, Saudi Arabia, and Cairo, Egypt, 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 and guidance. Although these posts had other mid- or seniorlevel 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 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. More recently, during a February 2006 visits to posts in Nigeria and China, we found similar consular vacancies. For example, first tour, entry-level officers in Chengdu and Shenyang, China, are filling midlevel consular positions. We have reported on numerous occasions that factors such as staffing shortages have contributed to long wait times for visas at some posts. Since 2002, State has received funding to address these shortfalls. Through the Diplomatic Readiness Initiative and other sources, State increased the number of Foreign Service officer consular positions by 364, from 1,037 in fiscal year 2002 to 1,401 in fiscal year 2005. However, while we have not studied this issue, the disparity in wait times among posts may indicate the need to reallocate positions to address the growing consular demand and long wait times at some posts. In the event of staffing shortfalls, State has mechanisms for requesting increased staff resources. For example, 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 package--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 consular officials worked with human resource officials to create this position, which, according to State officials, would be filled by summer 2005. State's 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 to the United States, due to concerns that such staff may be more apt to have poor morale or be less productive. 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. According to a deputy assistant secretary for human resources, Consular Affairs can prioritize those positions that require immediate staffing to ensure that officers are assigned to fill critical staffing gaps. 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. Thus, as we have previously reported, certain high-priority positions may not be filled if Foreign Service officers do not bid on them. In commenting on a draft of our September 2005 report, 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. Moreover, State claimed that it appreciates that priority positions must be filled worldwide based on the relative strategic importance of posts and positions. While State argued that every visa consular officer is serving a strategic function, the department identified one post, Embassy Baghdad, as a clear example of a priority post. Further, State acknowledged that it has fewer midlevel consular officers than it needs. 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. Although State noted that it anticipated addressing this shortage of midlevel consular officers, it did not indicate when that gap would be filled. On January 18, 2006, the Secretary of State announced the department's plan to restructure overseas and domestic staffing. This plan aims to shift U.S. diplomatic personnel from European posts and headquarters offices to posts in Africa, South Asia, the Middle East, and elsewhere. While we have not conducted a comprehensive review of this initiative, only midlevel political, economic, and public diplomacy officers, and not consular officers, would comprise the initial realignment of 100 positions, according to State officials. In February 2006, consular officials told us that, since our report, they concluded a review of consular position grades to ensure that they reflect the work requirements for each consular position. Based on this analysis, consular officials recommended that 47 positions be upgraded--from an entry- to midlevel position, for example--to reconcile the management structures of posts that have undergone rapid growth. However, 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 determined its staffing requirements and placed the right people in the right posts with the necessary skill levels. 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. However, given the large responsibility placed on consular officers, particularly entry-level officers, it is critical to provide consular posts with the resources necessary for them to be effective. Indeed, extensive delays for visa interview appointments point to the need for State to perform a rigorous assessment of staffing requirements to achieve its goal of having the right people with the right skills in the right places. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or Members of the Committee 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 Kathryn Bernet, Eugene Beye, Joseph Carney, and Jane Kim. Border Security: Strengthened Visa Process Would Benefit From Improvements in Staffing and Information Sharing. GAO-05-859. September 13, 2005. Border Security: Actions Needed to Strengthen Management of Department of Homeland Security's Visa Security Program. GAO-05-801. July 29, 2005. Border Security: Streamlined Visas Mantis Program Has Lowered Burden on Foreign Science Students and Scholars, but Further Refinements Needed. GAO-05-198. February 18, 2005. Border Security: State Department Rollout of Biometric Visas on Schedule, but Guidance Is Lagging. GAO-04-1001. September 9, 2004. Border Security: Additional Actions Needed to Eliminate Weaknesses in the Visa Revocation Process. GAO-04-795. July 13, 2004. Visa Operations at U.S. Posts in Canada. GAO-04-708R. May 18, 2004. Border Security: Improvements Needed to Reduce Time Taken to Adjudicate Visas for Science Students and Scholars. GAO-04-371. February 25, 2004. State Department: Targets for Hiring, Filling Vacancies Overseas Being Met but Gaps Remain in Hard-to-Learn Languages. GAO-04-139. November 19, 2003. Border Security: New Policies and Procedures Are Needed to Fill Gaps in the Visa Revocation Process. GAO-03-798. June 18, 2003. Border Security: Implications of Eliminating the Visa Waiver Program. GAO-03-38. November 22, 2002. Technology Assessment: Using Biometrics for Border Security. GAO-03- 174. November 15, 2002. Border Security: Visa Process Should Be Strengthened as an Antiterrorism Tool. GAO-03-132NI. October 21, 2002. State Department: Staffing Shortfalls and Ineffective Assignment System Compromise Diplomatic Readiness at Hardship Posts. GAO-02-626. June 18, 2002. State Department: Tourist Visa Processing Backlogs Persist and U.S. Consulates. GAO/NSIAD-98-69. March 13, 1998. State Department: Backlogs of Tourist Visas at U.S. Consulates. GAO/NSIAD-92-185. April 30, 1992. 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 deciding to approve or deny a visa application, the Department of State's (State) consular officers are on the front line of defense in protecting the United States against those who seek to harm U.S. interests. To increase border security following the September 11 attacks, Congress, State, and the Department of Homeland Security initiated a series of changes to border security policies and procedures. These changes have added to the complexity of consular workload. But consular officers must balance this security responsibility against the need to facilitate legitimate travel. In recent years, GAO has issued a series of reports on the visa process. This statement discusses (1) wait times for visas, (2) factors that affect wait times, and (3) GAO's recent work on consular staffing. As a result of changes since September 11, 2001, aimed at strengthening visa policies and procedures, applicants have faced extensive wait times for visas at some posts. According to consular officials, posts that consistently have wait times of 30 days or longer for interview appointments may have a resource problem. During a recent 6-month period, 97 of State's 211 visa-issuing posts reported maximum wait times of 30 or more days in at least one month; at 20 posts, the reported wait times were in excess of 30 days for this entire 6-month period. Further, in February 2006, 9 posts reported wait times in excess of 90 days. Several factors have contributed to these delays at some consular posts. For example, Congress, State, and the Department of Homeland Security have initiated new policies and procedures since the September 11 attacks to strengthen the security of the visa process; however, these new requirements have increased consular workload and exacerbated delays. Additionally, some applicants have faced additional delays because of special security checks for national security concerns. Other factors, such as resurgence in visa demand and ongoing embassy facility limitations, could continue to affect wait times. We recently reported that State had not conducted a worldwide, comprehensive assessment of staffing requirements for visa operations. While State has increased hiring of consular officers, there is a need for such an assessment to ensure that State has sufficient staff at key consular posts, particularly in light of the visa processing delays at some posts.

As you know, Mr. Chairman, the decennial census is a constitutionally mandated enterprise critical to our nation. Census data are used to apportion seats and redraw Congressional districts, and to help allocate over $400 billion in federal aid to state and local governments each year. We added the 2010 Census to our list of high-risk areas in March 2008 because improvements were needed in the Bureau's management of IT systems, the reliability of the HHCs, and the quality of the Bureau's cost estimates. Compounding the risk was that the Bureau canceled a full dress rehearsal of the census that was scheduled in 2008, in part, because of the HHC's performance problem, which included freeze-ups and unreliable data transmissions. Although the Bureau had planned to use the HHCs to collect data for both address canvassing and in going door to door following up with nonrespondents, the Bureau ultimately decided to use the HHCs for address canvassing and revert to collecting nonresponse follow-up data using paper. As a result of this decision, the Bureau had to redesign components of its field data collection system to accommodate the new approach, thus introducing new risks. Among other actions, in response to our findings and recommendations, the Bureau strengthened its risk management efforts, including the development of a high-risk improvement plan that described the Bureau's strategy for managing risk and key actions to address our concerns. Still, in March 2009, in testimony before this Subcommittee, we continued to question the Bureau's readiness. Specifically, we noted that with little more than a year remaining until Census Day, uncertainties surrounded critical operations and support systems, and the Bureau lacked sufficient policies, procedures, and trained staff to develop high-quality cost estimates. Moving forward, we said that it will be essential for the Bureau to develop plans for testing systems and procedures not included in the dress rehearsal, and for Congress to monitor the Bureau's progress. Since 2005, we have reported on weaknesses in the Bureau's management of its IT acquisitions, and issues continue concerning the Bureau's IT management and testing of key 2010 Census systems. In March 2009, we reported and testified that while the Bureau took initial steps to enhance its program-wide oversight of testing activities, those steps had not been sufficient. Furthermore, while the Bureau had made progress in testing key decennial systems, critical testing activities remained to be performed before they would be ready to support the 2010 Census. At that time we recommended that the Bureau improve its oversight of the completion of testing activities for key systems. In response to our findings and recommendations, the Bureau has taken several steps to improve its management of IT for the 2010 Census. For example, the Bureau named a Decennial Census Testing Officer whose primary responsibilities include monitoring testing for decennial census activities. In order to help improve the rigor and quality of test planning and documentation, this official leads a bimonthly process to consolidate and evaluate test planning and status across all key decennial census operations, resulting in a decennial census testing overview document. With respect to system testing, progress is being made, but much testing remains to be completed as shown in the following table. The Bureau has also made progress in end-to-end testing, but substantial work remains to be completed. For example, the Bureau has completed limited end-to-end tests for nonresponse follow-up and group-quarters enumeration on the Paper-Based Operations Control System (PBOCS), a work flow management system the Bureau developed late in the census cycle when it moved from the HHCs to a paper-based approach to nonresponse follow-up and other field operations. However, Bureau officials stated that, although they were satisfied with the results of the tests, significant additional testing will be needed. For example, several critical issues were identified during these tests that will need to be resolved and retested. In addition, the test was not designed to evaluate the level of system performance needed while processing the estimated 48 million housing units that will be in the nonresponse-follow-up workload. According to the Bureau, a performance test is being designed for the first major release; however, detailed plans for this test have not yet been completed. Finally, the test was performed with experienced census employees, while the system will be used by newer, temporary employees. Given the importance of IT systems to the decennial census, it is critical that the Bureau ensure these systems are thoroughly tested. Bureau officials have repeatedly stated that the limited amount of time remaining will make completing all testing activities challenging. The Bureau faces significant challenges finalizing PBOCS. Most notably, the Bureau needs to determine the remaining detailed requirements for the system to be developed. As of early September 2009, the Bureau had established high-level requirements for its PBOCS but had not yet finalized the detailed requirements. High-level requirements describe in general terms what functions the system will accomplish, such as producing specific management reports on the progress of specific paper-based operations or checking-out and checking-in groups of census forms for shipping or processing. Detailed requirements describe more specifically what needs to be done in order to accomplish such functions. For PBOCS, such detailed requirements might include, for example, which data from which data source should be printed where on a specific management report. According to Bureau officials, in the absence of such specificity in the requirements for the 2008 dress rehearsal, contract programmers with little decennial census experience made erroneous assumptions about which data to use when preparing some quality control reports. As a result, quality assurance managers were unable to rely on the reports for tracking progress. In recognition of the serious implications that shortcomings in PBOCS would have for the conduct of the 2010 Census and to see whether there were additional steps that could be taken to mitigate the outstanding risks to successful PBOCS development and testing, in June 2009, the Bureau chartered an assessment of PBOCS, chaired by the Bureau's chief information officer (CIO). The assessment team reported initially in late July 2009 and provided an update the following month. The review stated that the PBOCS developers had made a strong effort to involve the system stakeholders in the development process. However, the review also identified several concerns with PBOCS development. For example, the review found and we confirmed that the Bureau could improve its requirements management for PBOCS. According to the CIO, the Bureau has taken steps to address some of these findings, such as providing additional resources for testing and development; however, resolving problems found during testing before the systems need to be deployed will be a challenge. At the end of our review, the Bureau presented evidence of the steps it had taken to document and prioritize requirements. We did not assess the effectiveness of these steps. Until the Bureau completes the detailed requirements for PBOCS, it will not have reasonable assurance that PBOCS will meet the program's needs. The Bureau is continuing to examine how improvements will be made. A successful census relies on an accurate list of all addresses where people live in the country, because it identifies all households that are to receive a census questionnaire and serves as a control mechanism for following up with households that fail to respond. If the address list is inaccurate, people can be missed, counted more than once, or included in the wrong location. Address canvassing is one of several procedures the Bureau uses to help ensure an accurate address list and, because it is based on on-site verification, it is particularly important for identifying the locations of nontraditional or "hidden" housing units such as converted attics and basements. Although these types of dwellings have always existed, the large number of foreclosures the nation has recently experienced, as well as the natural disasters that have hit the Gulf Coast and other regions, have likely increased the number of people doubling-up, living in motels, cars, tent cities, and other less conventional living arrangements. Such individuals are at greater risk of being missed in the census. The Bureau conducted address canvassing from March to July 2009. During that time, about 135,000 address listers went door to door across the country, comparing the housing units they saw on the ground to what was listed in the database of their HHCs. Depending on what they observed, listers could add, delete, or update the location of housing units. Although the projected length of the field operation ranged from nine to fourteen weeks, most early local census offices completed the effort in less than 10 weeks. Moreover, the few areas that did not finish early were delayed by unusual circumstances such as access issues created by flooding. The completion rate is a remarkable accomplishment given the HHC's troubled history. The testing and improvements the Bureau made to the reliability of the HHCs prior to the start of address canvassing, including a final field test that was added to the Bureau's preparations in December 2008, played a key role in the pace of the operation, but other factors, once address canvassing was launched, were important as well, including the (1) prompt resolution of problems with the HHCs as they occurred and (2) lower than expected employee turnover. With respect to the prompt resolution of problems, although the December 2008 field test indicated that the more significant problems affecting the HHCs had been resolved, various glitches continued to affect the HHCs in the first month of the operation. For example, we were informed by listers or crew leaders in 14 early local census offices that they had encountered problems with transmissions, freeze-ups, and other problems. Moreover, in 10 early local census offices we visited, listers said they had problems using the Global Positioning System function on their HHCs to precisely locate housing units. When such problems occurred, listers called their crew leaders and the Bureau's help desk troubleshooted the problems. When the issues were more systemic in nature, such as a software issue, the Bureau was able to quickly fix them using software patches. Moreover, to obtain an early warning of trouble, the Bureau monitored key indicators of the performance of the HHCs such as the number of successful and failed HHC transmissions. This approach proved useful as Bureau quality control staff were alerted to the existence of a software problem when they noticed that the devices were taking a long time to close out completed assignment areas. The Bureau also took steps to address procedural issues. For example, in the course of our field observations, we noticed that in several locations listers were not always adhering to training for identifying hidden housing units. Specifically, listers were instructed to knock on every door and ask, "Are there any additional places in this building where people live or could live?" However, we found that listers did not always ask this question. On April 28, 2009, we discussed this issue with senior Bureau officials. The Bureau, in turn, transmitted a message to listers' HHCs emphasizing the importance of following training and querying residents if possible. Lower than expected attrition rates and listers' availability to work more hours than expected also contributed to the Bureau's ability to complete the address canvassing operation ahead of schedule. For example, the Bureau had planned for 25 percent of new hires to quit before, during, or soon after training; however, the national average was 16 percent. Bureau officials said that not having to replace listers with inexperienced staff accelerated the pace of the operation. Additionally, the Bureau assumed that employees would be available 18.5 hours a week. Instead, they averaged 22.3 hours a week. The Bureau's address list at the start of address canvassing consisted of 141.8 million housing units. Listers added around 17 million addresses and marked about 21 million for deletion because, for example, the address did not have a structure. All told, listers identified about 4.5 million duplicate addresses, 1.2 million nonresidential addresses, and about 690,000 addresses that were uninhabitable structures. Importantly, these preliminary results represent actions taken during the production phase of address canvassing and do not reflect actual changes made to the Bureau's master address list as the actions are first subject to a quality control check and then processed by the Bureau's Geography Division. The preliminary analysis of addresses flagged for add and delete shows that the results of the operation (prior to quality control) were generally consistent with the results of address canvassing for the 2008 dress rehearsal. Table 2 compares the add and delete actions for the two operations. According to the Bureau's preliminary analysis, the estimated cost for address canvassing field operations was $444 million, or $88 million (25 percent) more than its initial budget of $356 million. As shown in table 3, according to the Bureau, the cost overruns were because of several factors. One such factor was that the address canvassing cost estimate was not comprehensive, which resulted in a cost increase of $41 million. The Bureau inadvertently excluded 11 million addresses identified in address file updates from the initial address canvassing workload and fiscal year 2009 budget. Further, the additional 11 million addresses increased the Bureau's quality control workload, where the Bureau verifies certain actions taken to correct the address list. Specifically, the Bureau failed to anticipate the impact these addresses would have on the quality control workload and therefore did not revise its cost estimate accordingly. Moreover, under the Bureau's procedures, addresses that failed quality control would need to be recanvassed, but the Bureau's cost model did not account for the extra cost of recanvassing of any addresses. As a result, the Bureau underestimated its quality control workload by 26 million addresses which resulted in $34 million in additional costs, according to the Bureau. Bringing aboard more staff than was needed also contributed to the cost overruns. For example, according to the Bureau's preliminary analysis, training additional staff accounted for about $7 million in additional costs. Bureau officials attributed the additional training cost to inviting additional candidates to initial training because of concerns that recruiting and hiring staff would be problematic, even though (1) the Bureau's staffing goals already accounted for the possibility of high turnover and (2) the additional employees were not included in the cost estimate or budget. The largest field operation will be nonresponse follow-up, when the Bureau is to go door to door in an effort to collect data from households that did not mail back their census questionnaire. Over 570,000 enumerators will need to be hired for that operation. To better manage the risk of staffing difficulties while simultaneously controlling costs, several potential lessons learned can be drawn from the Bureau's experience during address canvassing. For example, we found that the staffing authorization and guidance provided to some local census managers were unclear and did not specify that there was already a cushion in the hiring goals for local census offices to account for potential turnover. Also, basing the number of people invited to initial training on factors likely to affect worker hiring and retention, such as the local employment rate, could help the Bureau better manage costs. According to Bureau officials, they are reviewing the results from address canvassing to determine whether they need to revisit the staffing strategy for nonresponse follow-up and have already made some changes. For example, in recruiting candidates, when a local census office reaches 90 percent of its qualified applicant goal, it is to stop blanket recruiting and instead focus its efforts on areas that need more help, such as tribal lands. However, in hiring candidates, the officials pointed out that they are cautious not to underestimate resource needs for nonresponse follow-up based on address canvassing results because they face different operational challenges in that operation than for address canvassing. For example, for nonresponse follow-up, the Bureau needs to hire enumerators who can work in the evenings when people are more likely to be at home and who can effectively deal with reluctant respondents, whereas with address canvassing, there was less interaction with households and the operation could be completed during the day. Problems with accurately estimating the cost of address canvassing are indicative of long-standing weaknesses in the Bureau's ability to develop credible and accurate cost estimates for the 2010 Census. Accurate cost estimates are essential to a successful census because they help ensure that the Bureau has adequate funds and that Congress, the administration, and the Bureau itself can have reliable information on which to base decisions. However, in our past work, we noted that the Bureau's estimate lacked detailed documentation on data sources and significant assumptions, and was not comprehensive because it did not include all costs. Following best practices from our Cost Estimating and Assessment Guide, such as defining necessary resources and tasks, could have helped the Bureau recognize the need to update address canvassing workload and other operational assumptions, resulting in a more reliable cost estimate. Given the Bureau's past difficulties in developing credible and accurate cost estimates, we are concerned about the reliability of the figures that were used to support the 2010 budget, especially the costs of nonresponse follow-up, which is estimated to cost $2.7 billion. We have discussed the cost estimate for nonresponse follow-up with Bureau officials, and they have said they are looking to see how foreclosures and vacant housing units might affect the nonresponse follow-up workload. In addition, Bureau officials said they will analyze address canvassing data and determine if there are any implications for future operations. Nevertheless, there still remains a great deal of uncertainty around the final cost of the 2010 Census. In part, this is because of changes made to the census design after April 2008, when the Bureau reverted to a paper- based data collection method for nonresponse follow-up in response to the performance problems with the HHCs. The uncertainty also stems from the fact that the assumptions used to develop the revised cost estimate were not tested during the 2008 dress rehearsal. According to budget documents, after the decision to return to a paper-based nonresponse follow-up, the life cycle cost estimate increased by over $3 billion dollars. Moving forward, it will be important for the Bureau to ensure the reliability of the 2020 cost estimate, and the Bureau has already taken several actions in that regard. For example, based on recommendations from our June 2008 report, the Bureau plans to train its staff on cost estimation skills, including conducting uncertainty analysis. In addition, the Bureau is developing the Decennial Budget Integration Tool (DBiT), which according to the Bureau, should consolidate budget information and enable the Bureau to better document its cost estimates. Officials said that DBiT is capturing actual fiscal year 2009 costs, which will be used to estimate the life cycle cost for the 2020 census. However, officials also said that DBiT needs further testing, and may not be fully used until the 2012 budget. To better screen its workforce of hundreds of thousands of temporary census workers, the Bureau plans to fingerprint its temporary workforce for the first time in the 2010 Census. In past censuses, temporary workers were only subject to a name background check that was completed at the time of recruitment. The Federal Bureau of Investigation (FBI) is to provide the results of a name background check when temporary workers are first recruited. At the end of the workers' first day of training, Bureau employees who have received around 2 hours of fingerprinting instruction are to capture two sets of ink fingerprint cards. The cards are then sent to the Bureau's National Processing Center in Jeffersonville, Indiana, to be scanned and electronically submitted to the FBI. If the results show a criminal record that makes an employee unsuitable for employment, the Bureau is to either terminate the person immediately or place the individual in nonworking status until the matter is resolved. If the first set of prints are unclassifiable, the National Processing Center is to send the FBI the second set of prints. However, fingerprinting during address canvassing was problematic. Of the over 162,000 employees hired for the operation, 22 percent--or approximately 35,700 workers--had unclassifiable prints that the FBI could not process. The FBI determined that the unclassifiable prints were generally the result of errors that occurred when the prints were first made. Factors affecting the quality of the prints included difficulty in first learning how to effectively capture the prints and the adequacy of the Bureau's training. Further, the workspace and environment for taking fingerprints was unpredictable, and factors such as the height of the workspace on which the prints were taken could affect the legibility of the prints. Consistent with FBI guidance, the Bureau relied solely on the results of the name background check for the nearly 36,000 employees with unclassifiable prints. However, it is possible that more than 200 people with unclassifiable prints had disqualifying criminal records but still worked, and had contact with the public during address canvassing. Indeed, of the prints that could be processed, fingerprint results identified approximately 1,800 temporary workers (1.1 percent of total hires) with criminal records that name check alone failed to identify. Of the 1,800 workers with criminal records, approximately 750 (42 percent) were terminated or were further reviewed because the Bureau determined their criminal records--which included crimes such as rape, manslaughter, and child abuse--disqualified them from census employment. Projecting these percentages to the 35,700 temporary employees with unclassifiable prints, it is possible that more than 200 temporary census employees might have had criminal records that would have made them ineligible for census employment. Applying these same percentages to the approximately 600,000 people the Bureau plans to fingerprint for nonresponse follow-up, unless the problems with fingerprinting are addressed, we estimate that approximately 785 employees with unclassifiable prints could have disqualifying criminal records but still end up working for the Bureau. Aside from public safety concerns, there are cost issues as well. The FBI charged the Bureau $17.25 per person for each background check, whether or not the fingerprints were classifiable. The Bureau stated that it has taken steps to improve image quality for fingerprints captured in future operations by refining instruction manuals and providing remediation training on proper procedures. In addition, the Bureau is considering activating a feature on the National Processing Center's scanners that can check the legibility of the image and thus prevent poor quality prints from reaching the FBI. These are steps in the right direction. As a further contingency, it might also be important for the Bureau to develop a policy for re-fingerprinting employees to the extent that both cards cannot be read. The scale of the destruction in those areas affected Hurricanes Katrina, Rita, and Ike made address canvassing in parts of Mississippi, Louisiana, and Texas, especially challenging (see fig. 1). Hurricane Katrina alone destroyed or made uninhabitable an estimated 300,000 homes. Recognizing the difficulties associated with address canvassing in these areas because of shifting and hidden populations and changes to the housing stock, the Bureau, partly in response to recommendations made in our June 2007 report, developed supplemental training materials for natural disaster areas to help listers identify addresses where people are, or may be, living when census questionnaires are distributed. For example, the materials noted the various situations listers might encounter, such as people living in trailers, homes marked for demolition, converted buses and recreational vehicles, and nonresidential space such as storage areas above restaurants. The training material also described the clues that could alert listers to the presence of non-traditional places where people are living and provided a script they should follow when interviewing residents on the possible presence of hidden housing units. Additional steps taken by the city of New Orleans also helped the Bureau overcome the challenge of canvassing neighborhoods devastated by Hurricane Katrina. As depicted in fig. 2 below, city officials replaced the street signs even in abandoned neighborhoods. This assisted listers in locating the blocks they were assigned to canvass and expedited the canvassing process in these deserted blocks. To further ensure a quality count in the hurricane affected areas, the Bureau plans to hand-deliver an estimated 1.2 million questionnaires (and simultaneously update the address list) to housing units in much of southeast Louisiana and south Mississippi that appear inhabitable, even if they do not appear on the address list updated by listers during address canvassing. Finally, the Bureau stated that it must count people where they are living on Census Day and emphasized that if a housing unit gets rebuilt and people move back, then that is where those people will be counted. However, if they are living someplace else, then they will be counted where they are living on Census Day. The Bureau has made remarkable progress in improving its overall readiness for 2010, with substantial strides being made in the management of its IT systems and other areas. That said, as I noted throughout this statement, considerable challenges and uncertainties lie ahead. While the decennial is clearly back on track, many things can happen over the next few months, and keeping the entire enterprise on plan continues to be a daunting challenge fraught with risks. Mr. Chairman and members of this Subcommittee, this concludes my statement. I would be happy to respond to any questions that you might have at this time. If you have any questions on matters discussed in this statement, please contact Robert N. Goldenkoff at (202) 512-2757 or by e-mail at [email protected]. Other key contributors to this testimony include Steven Berke, Virginia Chanley, Benjamin Crawford, Jeffrey DeMarco, Dewi Djunaidy, Vijay D'Souza, Elizabeth Fan, Ronald Fecso, Amy Higgins, Richard Hung, Kirsten Lauber, Jason Lee, Andrea Levine, Signora May, Ty Mitchell, Naomi Mosser, Catherine Myrick, Lisa Pearson, David Powner, David Reed, Jessica Thomsen, Jonathan Ticehurst, Shaunyce Wallace, Timothy Wexler, and Katherine Wulff. 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The decennial census is a constitutionally-mandated activity that produces data used to apportion congressional seats, redraw congressional districts, and help allocate billions of dollars in federal assistance. In March 2008, GAO designated the 2010 Census a high-risk area in part because of information technology (IT) shortcomings. The U.S. Census Bureau (Bureau) has since strengthened its risk management efforts and made other improvements; however, in March 2009, GAO noted that a number of challenges and uncertainties remained. This testimony discusses the Bureau's readiness for 2010 and covers: (1) the delivery of key IT systems, (2) preliminary findings on the results of address canvassing and the lessons learned from that operation that can be applied to subsequent field operations, and (3) the Bureau's progress in improving its cost estimation abilities. The testimony is based on previously issued and ongoing GAO work. The Bureau continues to make noteworthy gains in mitigating risks and in keeping the headcount on-track, but a number of challenges remain. Specifically, over the last few months, the Bureau has made important strides in improving oversight of testing key IT systems. For example, the Bureau named a testing officer to monitor the testing of census-taking activities. The Bureau has also made progress in system testing, but faces tight timeframes in finalizing the paper-based operations control system (PBOCS), which will be used to manage field operations. If any significant problems are identified during the testing phases of PBOCS, there will be little time, in most cases, to resolve the problems before the system needs to be deployed. Address canvassing, an operation where temporary workers known as listers go door-to-door to verify and update address data, finished ahead of schedule, but was over budget. Based on initial Bureau data, the preliminary figure on the actual cost of address canvassing is $88 million higher than the original estimate of $356 million, an overrun of 25 percent. A key reason for the overrun is that the Bureau did not update its cost estimates to reflect the changes to the address canvassing workload. Further, the Bureau did not follow its staffing strategy and hired too many listers. The Bureau's efforts to fingerprint employees, which was required as part of a criminal background check, did not proceed smoothly, in part because of training issues. As a result, over 35,000 temporary census workers--over a fifth of the address canvassing workforce--were hired despite the fact that their fingerprints could not be processed and they were not fully screened for employment eligibility. The Bureau is refining instruction manuals and taking other steps to improve the fingerprinting process for future operations. GAO is unable to verify the accuracy of the $14.7 billion estimated cost of the 2010 Census because key details and assumptions are unavailable. However, the Bureau is taking steps to improve its cost estimation process for 2020, including training its staff in cost estimation skills. While the Bureau has taken a number of actions to mitigate risk and its overall readiness for 2010 has improved, much work remains to be done. Many things can happen over the next few months, and keeping the entire enterprise on-plan will continue to be a daunting challenge fraught with risks. High levels of public participation, and continued Bureau and congressional attention to stewardship, performance, and accountability, will be key to a successful census.

The original Title I legislation was passed in 1965, but the 1994 reauthorization of ESEA mandated fundamental changes to the Title I program. One of the key changes involved the development of state systems of standards and assessments to ensure that students served by Title I were held to the same standards of achievement as all other children. Prior to 1994, some states had already implemented assessment systems, but these tended to be norm-referenced--students' performance was judged in relation to the performance of other students. The 1994 legislation required assessments that were criterion-based--students' performance was to be judged against an objective standard. Every state applying for Title I funds since 1994 agreed to implement the changes described in the 1994 law and to bring its assessment systems into compliance. States are also required to develop a definition of adequate yearly progress based on the assessments to hold schools accountable for educational progress. To help states that could not meet the proposed 2001 timeline, Education had authority to grant timeline waivers and compliance agreements to states under certain conditions. In its 2001 ESEA reauthorization, Congress increased testing requirements for states as well as the consequences for not improving test scores in schools and did not eliminate any of the requirements of the 1994 legislation. As shown in table 1, the 1994 and 2001 legislative requirements for assessment and accountability concern developing standards for content and performance; measuring improvement; implementing and administering assessments, including assessing students with limited English proficiency; reporting assessment data; and applying consequences for not meeting performance goals. Almost all states employ contractors to perform services to help them meet these requirements. Among states that we interviewed, contractors included private companies, universities, nonprofit organizations, and individual consultants. These entities were hired to provide services that may include assessment development, administration, scoring, analysis, and reporting of results. Some of these entities can provide combinations of services to states, such as test development and test scoring. States are responsible for monitoring contractor performance. Congress allowed states to phase in the 1994 ESEA requirements over time, giving states until the beginning of the 2000-01 school year to fully implement them with the possibility of limited extensions. Education is responsible for determining whether or not a state is in compliance with these requirements and is authorized under ESEA, to give states more time to implement the requirements as long as states are making adequate progress toward this goal. States submit evidence to Education showing that their system for assessing students and holding schools accountable meets Title I requirements. Education has contracted with individuals with expertise in assessments and Title I to review this evidence. The experts provide Education with a report on the status of each state regarding the degree to which a state's system for assessing students meets the requirements and deserves approval. Using this and other information, the Secretary sends each state a decision letter that summarizes the experts' review and communicates whether a state is in full compliance, in need of a timeline waiver, or more seriously, a compliance agreement. Education may withhold funds if a state does not meet the terms of its compliance agreement. The 1994 legislation was not specific in the amount of administrative funds that could be withheld from states failing to meet negotiated timelines, but the 2001 legislation states that Education must withhold 25 percent of state administrative funds until the state meets the 1994 requirements including the terms of any timeline waivers or compliance agreements. In June 2000, we issued a report on states' efforts to ensure compliance with key Title I requirements. At that time, we expressed concern about the number of states that were not positioned to meet the deadlines in the 1994 law. To increase compliance, we made two recommendations. We recommended that the Department of Education should (1) facilitate among states the exchange of information and best practices regarding the implementation of Title I requirements and (2) implement additional measures to improve research on the effectiveness of different services provided through Title I to improve student outcomes. Education continues to work on the implementation of these recommendations. In addition, we said that Congress should consider requiring that states' definitions of adequate yearly progress apply to disadvantaged children, as well as to the overall student population. The 2001 legislation does require that states apply adequate yearly progress requirements and report on the results by subgroups, including students in poverty, with disabilities, and with limited English proficiency. As of March 2002, 17 states were in compliance with the 1994 Title I assessment requirements; however, 35 were not. (See table 2.) Departmental approval of timeline waivers to give states more time to reach compliance has been granted for 30 states. Education has asked five states to enter into compliance agreements that will establish the final date by which they must be in compliance before losing Title I funding. Among other requirements, states that are not in compliance have most frequently not met the specific requirements to assess all students and break out assessment data by subcategories of students. The 2001 legislation requires states to implement additional assessments through 2008, thus substantially augmenting current assessment requirements. Education has published a notice of proposed negotiated rulemaking in the Federal Register and has solicited comments from outside parties in preparation for establishing state compliance standards for the 2001 legislation. When Education determines that a state is not in compliance with the 1994 Title I assessment requirements, it may grant the state a timeline waiver for meeting those requirements. A waiver may not exceed 3 years. Education officials indicate that the agency grants waivers to states that have a history of success in implementing significant portions of their assessment systems, have a clear plan with a definite timeline for complying with the Title I requirements, and have the capacity to carry out the plan and thus meet those requirements. When a state requests a waiver, it must provide Education with a plan that includes a timeline for addressing deficiencies in the state's assessment system. Education reviews this information to decide whether the waiver should be granted and its duration. So far, Education has granted timeline waivers to 30 states. (see table 3.) A compliance agreement is deemed necessary when Education determines that a state will not complete the implementation of its assessment system in a timely manner. According to Education officials, a state requiring a compliance agreement generally does not have a history of successful implementation, has not met a significant number of Title I requirements, and does not have a plan in place for meeting those requirements. Education recommends a compliance agreement so that a state may continue to receive Title I funds. Before Education may enter into a compliance agreement, a public hearing must be held in which the state has the burden of persuading Education that full compliance with the Title I requirements is not feasible until a future date. The state must be able to attain compliance within 3 years of the signing of the compliance agreement by the state and Education. The state then negotiates the terms of the agreement with Education. Education's written findings and the terms of the compliance agreement are published in the Federal Register. A state that enters into a compliance agreement to address requirements of the 1994 Title I law and subsequently fails to meet the requirements of the agreement can be subject to loss of some state Title I administrative funds. Education is presently working on five compliance agreements (Alabama, Idaho, Montana, West Virginia, and the District of Columbia) and has held public hearings for each. The 2001 reauthorization of ESEA was signed into law on January 8, 2002. The act provides states not in compliance with the 1994 Title I requirements at the time of the signing of the 2001 legislation with a 90-day period that started on January 8, 2002 to negotiate changes in the dates by which they must be in compliance with the 1994 requirements. After the conclusion of this 90-day period, the legislation prohibits further extensions for compliance with the 1994 requirements. States failing to meet these negotiated timelines will be subject to loss of some of their Title I administrative funds. According to senior Education officials, this loss could be significant to states, as many use federal program administrative funds to pay the salaries of state department of education staff. A review of documents from Education shows that noncompliant states have most commonly not met two Title I requirements--assessing all students and breaking out assessment data by subcategories of students. Title I does not permit states to exempt any student subgroup from their assessments and Education's guidance states that individual exemptions may be permitted by the states in extraordinary circumstances. Nonetheless, many states allow substantial exemptions for students with disabilities and limited English proficiency. Several states reported that they have only recently amended laws that prohibited testing of some students with limited English proficiency. Title I also requires states, local districts, and schools to report the performance of students overall and in a variety of subcategories. These categories are gender, race, ethnicity, English proficiency status, migrant status, disability status, and economic disadvantage. Many states disaggregated data for some but not all of these categories. Documents from Education show that data for the disabled, migrant, and economically disadvantaged subcategories are the most common subgroups excluded from state, district, and school reports. In addition, many states lag in other areas, such as aligning assessments to state content standards. To achieve compliance with the 2001 legislation, states will need to add new standards and increase assessment efforts, as detailed in table 1. In responding to our survey, 48 states reported that they have developed content standards in science, but only 16 reported having annual assessments for math and 18 reported annual assessments for reading in all grades 3 through 8. In addition, states will not have the 2 to 3 year timeline waivers available to them as they had when they worked to meet the 1994 requirements. New 2001 requirements listed in table 1 have deadlines that vary according to the requirement, and the Secretary of Education can give states 1 additional year from those deadlines to meet the new requirements, but only in case of a "natural disaster or a precipitous and unforeseen decline in the financial resources of the state." Since the majority of states have not met the requirements of the 1994 law, it appears that many states may not be well-situated as they work to meet the schedule for implementing new requirements that build upon the 1994 requirements. States successful in meeting key Title I requirements attributed their success primarily to four factors. These factors were (1) the efforts of state leaders to make Title I compliance a priority; (2) coordination between staff of different agencies and levels of government; (3) obtaining buy-in from local administrators, educators, and parents; and (4) the availability of state-level expertise. Survey respondents identified inadequate funding as an obstacle to compliance. The state Title I officials we interviewed said that their states' commitment of resources to norm- referenced assessments that conflicted with the 1994 Title I requirements contributed to this obstacle. Almost 80 percent of the respondents identified state leaders' efforts as a factor that facilitated their meeting the 1994 Title I requirements. In every state that had attained compliance with the Title I requirements, the officials that we interviewed said that the governor, legislators, or business leaders made compliance with the Title I requirements a high-priority. States described the development of high-level committees, new state legislation, and other measures to raise the visibility and priority of this issue. For example, one governor spearheaded a plan that used commissions to develop content standards and assessments aligned with those standards. Some state officials we interviewed reported that efforts by state department of education leaders resulted in major organizational changes in the state education department. For example, according to one Title I Director, the state changed the organizational structure and reporting relationships of state offices to organize them by function rather than by funding streams and to enhance coordination; according to another Title I Director, state leaders who did not support changes necessary to achieve compliance with Title I were replaced with staff that did support the changes. In responding to our survey, over 80 percent of the Title I officials identified the ability of staff or agencies to coordinate their efforts with one another as a factor that helped them meet requirements. In our interviews, state officials cited the necessity of coordination between state and local staff working in the areas of assessment, instruction, and procurement. Two of the states we interviewed specifically noted that when the assessment office shared a physical location with the Title I office, coordination was easier and the ability to achieve compliance with Title I was enhanced. Title I and other officials we interviewed in those states that had met the 1994 Title I assessment requirements noted that they had made great efforts to obtain buy-in from other state officials, local administrators, educators, and the public. They said that efforts to ensure buy-in paved the way for changes meant to ensure compliance with the assessment and accountability requirements of the1994 legislation. Several officials we interviewed reported holding public meetings and focus groups to obtain input from parents, teachers and local administrators regarding how the state should implement Title I requirements. They also reported conducting public relations campaigns to educate the public about the importance of complying with Title I requirements for standards-based assessment. One state, for example, conducted 6 years of focus groups and hearings and conducts a conference annually to allow local education officials to gain advice from experts regarding any concerns or problems they are having in implementing Title I requirements. In responding to our survey, over 80 percent of state Title I directors identified the availability of state level expertise as a factor that facilitated their efforts to meet Title I requirements. State officials we interviewed reported that training for teachers and district personnel was often needed to apply new content standards in the classroom and to administer assessments correctly. Two states, for example, used regional centers to educate local staff on assessments and standards. Fifty percent of survey respondents identified inadequate funding as an obstacle in moving toward compliance and noncompliant states cited this problem more often than compliant ones. In our interviews, Title I and assessment officials from noncompliant states reported that progress toward compliance with Title I requirements was stalled because of investments they had made in assessment systems that predated and conflicted with the requirements of the 1994 Title I reauthorization. Respondents said that they had made substantial investments of time and money in systems of assessment that often relied upon norm-referenced assessments and did not meet the 1994 requirement for criterion-based tests. They noted that it took their states several years to change from the old system of assessment to one meeting the requirements specified by the 1994 reauthorizing legislation. According to the officials we interviewed, building support to start again on another system and obtaining the funding made it more difficult to make the necessary changes in a timely manner. In addition, one survey respondent from a very small state noted that due to the state's size it has a small number of staff and does not have the technical expertise needed to develop a new system, thus hampering the state's ability to meet the requirements. Most states are taking some action to ensure that Title I assessments are scored accurately, that any exemptions for students with limited English proficiency are justified, and that students are receiving appropriate accommodations when these are needed to gather an accurate assessment of their abilities. Most states hire a contractor to score Title I assessments and about two-thirds of these states monitored the scoring performed by the contractor. Some states that hire contractors have found errors in the scoring the contractors did, and in some cases, these errors have had serious negative consequences for schools and students. Most states reported taking some actions to ensure that students with limited English proficiency and disabilities received appropriate accommodations during testing. Education is redesigning its current compliance and monitoring program to better monitor states' implementation of Title I. According to our survey results, most states (44) hire a contractor for test scoring, but 16 of these states identified no monitoring mechanism to ensure the accuracy of their contractor's scoring and reporting. Among those states that did report one or more monitoring mechanisms, 15 reported that they monitored the contractor's scoring by comparing a sample of original student test results to the contractor's results. A few states also reported, in interviews with us, that they compared their most recent test scores with those from previous years and looked for significant variations that suggested potential errors in scoring. However, in our interviews, some assessment officials indicated that they use this type of monitoring rather informally. The problems identified in assessment scoring suggest that these approaches do not always provide adequate assurance of complete and accurate results. Indeed, several of the states that use contractors to score tests reported that they have had problems with errors in scoring whether or not they had monitoring measures in place. In some cases, contractors marked correct answers as incorrect and in other cases the contractors calculated the scores incorrectly. The errors were discovered by a number of individuals, including local district officials, parents, and state agency staff. These scoring errors had impacts on students, families, and school and district resources. Based on erroneous scores calculated by a contractor, one state sent thousands of children to summer school in the mistaken belief that their performance was poor enough to meet the criterion for summer intervention. In addition to disrupting families' summer plans and potentially preventing student promotions, this may have drawn resources away from other necessary activities. In another case, based on a contractor's erroneous scoring, a state incorrectly identified several schools as "in need of improvement," a designation that carries with it both bad publicity and extra expense, for example, districts may have to fund the needed improvements. A few state officials that we interviewed told us that they have begun instituting processes to check the accuracy of scoring. For example, three states said that they had hired individuals who were experts in test scoring or they hired other third parties to conduct independent audits. States that were in compliance with 1994 Title I assessment requirements generally had more complete monitoring systems, including measures such as technical advisory committees to review results, conduct site visits, and follow a sample of tests through the scoring and reporting process. In contrast, several states indicated they are still relying on contractor self- monitoring to ensure accurate scoring. Although Education is obligated under the Federal Managers' Financial Integrity Act of 1982 and the Single Audit Act to ensure that states that receive federal funds comply with statutory and regulatory requirements to monitor contractors, it currently takes limited action regarding states' monitoring of assessment contractors. Education's inspector general has reported deficiencies in an important vehicle for such oversight - - Education's compliance reviews of state programs. The compliance reviews are conducted on a 4-year cycle and include an on-site visit that lasts 1 week. Specifically, the OIG cited insufficient time to conduct the reviews, lack of knowledge among Education staff about areas they were reviewing, and a lack of consistency in how the reviews were conducted. Senior Education officials told us the department is redesigning the current compliance and monitoring program used for its on-site visits to better focus on outcomes and accountability in Title I and that it is addressing the OIG's recommendations. However, a senior Education official who is working on the redesign of the compliance reviews told us that the current draft plans did not include specific checks on state monitoring of assessment scoring. Confidence in the accuracy of test scoring is critical to acceptance of the test results' use in assessing school performance. According to our surveys and interviews, 33 states have taken at least minimal actions to ensure any exemptions for students with limited English proficiency are justified and 41 states take actions to ensure accommodations for students with disabilities are appropriate. Most states reported that they had developed standards for districts to follow in accommodating these students so that assessments could yield accurate measures of their performance. However, states reported few actions that would ensure that these guidelines were being followed. For example, 17 states reported that they compare the number of students with limited English proficiency tested within a given year against the number for the previous year. They used this comparison as their means of verifying that the numbers of students receiving exemptions were reasonable. As the pool of students in a particular school can change substantially from year to year, this comparison has obvious limitations. Moreover, students' status, for example with respect to English proficiency, can change from year to year. Similarly, 37 states reported using an annual comparison of the number of students with disabilities being tested as a check for appropriate accommodations. However, it is not evident how such comparisons would allow states to ascertain the appropriateness of the accommodations. Survey results and interviews did indicate that more states are taking actions to monitor accommodations for students with disabilities than for students with limited English proficiency. For example, while 25 states reported that they had standards for accommodating students with limited English proficiency, 36 had standards for accommodating students with disabilities. The state officials that we interviewed told us that this was because districts built upon steps they had taken under the Individuals with Disabilities Education Act (IDEA) to document the accommodations needed by students with disabilities. In general, states said that the districts have more experience and technical expertise for assessing and supporting students with disabilities because of working under IDEA for many years. In contrast, some states lacked consistent standards for identifying students with limited English proficiency and more states were still working to develop alternate assessments or accommodations for these students. Augmenting the 1994 requirements, the new 2001 legislation requires that states annually assess the language proficiency of students with limited English proficiency by the 2002-03 school year. States do conduct cyclical monitoring of the implementation of all their programs that might be used to assess the appropriateness of district policy and practice with regard to testing accommodations. However, in a recent review,we found that states varied dramatically in the frequency of their on-site visits. The average time between visits to districts ranged from 2 years or less (6 states) to more than 7 years (17 states). This snapshot of the states' status with respect to the 1994 Title I requirements suggests that many states may not be well-positioned to meet the requirements added in 2001. Only 17 states were in compliance with the assessment requirements of the 1994 law in March of 2002; therefore, the majority of states will still be working on meeting the 1994 requirements as they begin work toward meeting the new requirements. In addition, despite the enhanced emphasis on assessment results, states still appear to be struggling with ensuring that assessment data are complete and correct. The 1994 and 2001 ESEA reauthorizations raised student assessments to a new level of importance. The assessments are intended to help ensure that all students, including those who have disabilities and those who have limited English proficiency are meeting challenging standards. In addition, assessment results are a key part of the mechanism for holding both schools and states accountable for improving educational performance. Thus, ensuring the completeness and accuracy of assessment data is central to measuring students' progress and ensuring accountability. Without adequate oversight of assessment scoring, efforts to identify and improve low-performing schools could be hindered by lack of confidence in assessment results or uncertainty regarding whether particular schools have been appropriately identified for improvement. Education's current monitoring does not include specific oversight of how states ensure the quality of scoring contractors' work, but Education's revision of its monitoring process provides the agency with an opportunity to help states ensure that scoring done by contractors is accurate. To enhance confidence in state assessment results, we recommend that when the Department of Education monitors state compliance with federal programs, it include checks for contractor monitoring related to Title I, Part A. Specifically, Education should include in its new compliance reviews a check on the controls states have in place to ensure proper test scoring and the effective implementation of these controls by states. We provided Education with a draft of this report for review. The Department's official comments are printed in appendix II. In its comments, Education agreed with our recommendation. Education also provided us with technical comments that we incorporated in the report as appropriate. We are sending copies of this report to appropriate congressional committees and other interested parties. If you have any questions about this report, please contact me on (202) 512-7215 or Betty Ward-Zukerman on (202) 512-2732. Key contributors to this report were Mary Roy, G. Paul Chapman II, Laura Pan Luo, Corinna Nicolaou, and Patrick DiBattista. We conducted this review in conjunction with our partners in the Domestic Working Group. The Domestic Working Group's objective is to allow officials in the federal, state, and local governmental audit communities to interact on a personal and informal basis on various topics of mutual concern. The group consists of 18 (6 federal, 6 state, and 6 local) top officials and is intended to complement the work of the intergovernmental audit forums and other professional associations. For this review, the Texas State Auditor's Office conducted a detailed assessment of data quality at the state and local levels in Texas, while the Department of Education's Office of Inspector General did so at the state and local levels in California and conducted additional work on control processes at the Department of Education. In Pennsylvania, the Pennsylvania Department of Auditor General conducted work at the state level and the Philadelphia Controller's Office pursued the same goal within the city of Philadelphia. To complement these efforts, GAO surveyed all states and conducted detailed interviews with several regarding their experiences in implementing major provisions of Title I. Specifically, we reviewed three key questions: (1) the status of states' compliance with key 1994 Title I assessment requirements; (2) factors that have hindered or helped states move toward meeting the requirements; and (3) the actions states are taking to ensure that Title I assessments are scored accurately, exemptions for students with limited English proficiency are justified, and students with disabilities are accommodated during testing according to federal regulations. We obtained information on the first objective from the Department of Education. We met with Education officials and obtained updated listings of compliance throughout the audit. In addition, we reviewed state decision letters, peer reviews of state assessment systems, and reports completed or commissioned by Education's Planning and Evaluation Service. To address the second and third questions, we used both a state survey of Title I directors and detailed interviews with state Title I officials and other state officials who played a key role in Title I compliance - often assessment officials and sometimes Special Education, program evaluation, and information technology officials. We sent the survey to all 50 state directors and to the District of Columbia and Puerto Rico. We received 50 completed surveys. We followed up with 19 states to clarify and expand on questions in the interview related to contracting for the scoring of tests. We interviewed officials from 5 states that had assessment systems approved by Education and 3 states that were still trying to attain compliance. We also interviewed two expert reviewers, Education officials with responsibility for Title I and program review, three officials at Education's regional assistance centers, and officials at the Council of Chief of State School Officers. We coordinated our work and findings with our audit partners, who provided us with information relative to their states' activities.

Concerned that Title I of the Elementary and Secondary Education Act (ESEA) had not significantly improving the educational achievements of children at risk, Congress mandated major changes in 1994. States were required to adopt or develop challenging curriculum content and performance standards, assessments aligned with content standards, and accountability systems to measure progress in raising student achievement. In return, states were given greater flexibility in the use of Title I and other federal funds. The No Child Left Behind Act of 2001 augments the assessment and accountability requirements that states must implement and increases the stakes for schools that fail to make adequate progress. The 1994 legislation required states to comply with the requirements by January 2001 but allowed the Department of Education to extend that deadline. Education has granted waivers to 30 states to give them more time to meet all requirements. If states fail to meet the extended timeliness, they are subject to the withholding of some Title I administrative funds. Title I directors indicated that a state's ability to meet the 1994 requirements improved when both state leaders and state agency staff made compliance a priority and coordinated with one another. Most directors said that inadequate funding hindered compliance. Many of the states reported taking action to ensure that Title I assessments were scored accurately, that any exemptions for students with limited English proficiency were justified, and students with disabilities were receiving appropriate testing accommodations. As of March 2002, 17 states had complied with the 1994 assessment requirements; 35 states had not.

Among other protections, HIPAA's standards for health coverage, access, portability, and renewability guarantee access to coverage for certain employees and individuals, prohibit carriers from refusing to renew coverage on the basis of a person's health status, and place limits on the use of preexisting condition exclusion periods. However, not all standards apply to all markets or individuals. For example, guarantees of access to coverage for employers apply only in the small-group market, and the individual market guarantee applies only to certain eligible individuals who lose group coverage. (The appendix contains a summary of these standards by market segment.) ensuring that group health plans comply with HIPAA standards, which is an extension of its current regulatory role under the Employee Retirement Income Security Act of 1974 (ERISA). Treasury also enforces HIPAA requirements on group health plans but does so by imposing an excise tax under the Internal Revenue Code on employers or plans that do not comply with HIPAA. HHS is responsible for enforcing HIPAA with respect to insurance carriers in the group and individual markets, but only in states that do not already have similar protections in place or do not enact and enforce laws to implement HIPAA standards. This represents an essentially new role for that agency. The implementation of HIPAA is ongoing, in part, because the regulations were issued on an "interim final" basis. Further guidance needed to finalize the regulations has not yet been issued. In addition, various provisions of HIPAA have different effective dates. Most of the provisions became effective on July 1, 1997, but group-to-individual guaranteed access in 36 states and the District of Columbia had until January 1, 1998, to become effective. And although all provisions are now in effect, individual group plans do not become subject to the law until the start of their plan year on or after July 1, 1997. For some collectively bargained plans, this may not be until 1999 or later, as collective bargaining agreements may extend beyond 12 months. During the first year of implementation, federal agencies, the states, and issuers have taken various actions in response to HIPAA. In addition to publishing interim final regulations by the April 1, 1997, statutory deadline, Labor and HHS have conducted educational outreach activities. State legislatures have enacted laws to implement HIPAA provisions, and state insurance regulators have written regulations and prepared to enforce them. Issuers of health coverage have modified their products and practices to comply with HIPAA. To ensure that individuals losing group coverage have guaranteed access--regardless of health status--to individual market coverage, HIPAA offers states two different approaches. The first, which HIPAA specifies, is commonly referred to as the "federal fallback" approach and requires all carriers who operate in the individual market to offer eligible individuals at least two health plans. (This approach became effective on July 1, 1997.) The second approach, the so-called "alternative mechanism," grants states considerable latitude to use high-risk pools and other means to ensure guaranteed access. (HIPAA requires states adopting this approach to implement it no later than Jan. 1, 1998.) Among the 13 states using the federal fallback approach, we found that some initial carrier marketing practices may have discouraged HIPAA eligibles from enrolling in products with guaranteed access rights. After the federal fallback provisions took effect, many consumers told state insurance regulators that carriers did not disclose the existence of a product to which the consumers had HIPAA-guaranteed access rights or, when the consumers specifically requested one, the carrier said it did not have such a product available. Also, some carriers initially refused to pay commissions to insurance agents who referred HIPAA eligibles. Insurance regulators in two of the three federal fallback states we visited told us that some carriers advised agents against referring HIPAA-eligible applicants or paid reduced or no commissions. Recently, though, this practice appears to have abated. We also found that premiums for products with guaranteed access rights may be substantially higher than standard rates. In the three federal fallback states we visited, we found rates ranging from 140 to 400 percent of the standard rate, as indicated in table 1. Anecdotal reports from insurance regulators and agents in federal fallback states suggest rates of 600 percent or more of the standard rate are also being charged. We also found that carriers typically evaluate the health status of applicants and offer healthy individuals access to their lower-priced standard products. This practice could cause HIPAA products to be purchased disproportionately by unhealthy, more costly individuals, which, in turn, could precipitate further premium increases. Carriers charge higher rates because they believe HIPAA-eligible individuals will, on average, be in poorer health, and they seek to prevent non-HIPAA-eligible individuals from subsidizing eligibles' expected higher costs. Carriers permit or even encourage healthy HIPAA-eligible individuals to enroll in standard plans. According to one carrier official, denying HIPAA eligibles the opportunity to enroll in a less expensive product for which they qualify would be contrary to the consumers' best interests. In any case, carriers that do not charge higher premiums to HIPAA eligibles could be subject to adverse selection. That is, once a carrier's low rate for eligible individuals became known, agents would likely refer less healthy HIPAA eligibles to that carrier, which would put it at a competitive disadvantage. Finally, HIPAA does not specifically regulate premium rates and, with one exception, the regulations do not require a mechanism to narrow the disparity of rates for products with guaranteed access rights. The regulations offer three options for carriers to provide coverage to HIPAA-eligible individuals in federal fallback states, only one of which includes an explicit requirement to use some method of risk spreading or financial subsidy to moderate rates for HIPAA products. This limited attention to rates in the regulations, some state regulators contend, permits issuers to charge substantially higher rates for products with guaranteed access rights. expected to have guaranteed access to insurance coverage. One state reported receiving consumer calls at a rate of 120 to 150 a month, about 90 percent of which related to the group-to-individual guaranteed access provision. Similarly, an official from one large national insurer told us that many consumers believe the law covers them when it actually does not. Issuers of health coverage are concerned about the administrative burden and the unintended consequences of certain HIPAA requirements. One persistent concern has been the administrative burden and cost of complying with the requirement to issue certificates of creditable coverage to all enrollees who terminate coverage. Some issuers are concerned that certain information, such as the status of dependents on a policy, is difficult or time consuming to obtain. Some state officials are concerned that Medicaid agencies, which are also subject to the requirement, may face an especially difficult burden because Medicaid recipients tend to enroll in and disenroll from the Medicaid program frequently. This could require Medicaid agencies to issue a higher volume of certificates. Finally, issuers suggest that many of the certificates will not be needed to prove creditable coverage. Several issuers and state insurance regulators point out that portability reforms passed by most states have worked well without a certificate issuance requirement. Also, many group health plans do not contain preexisting condition exclusion clauses, and therefore the plans do not need certificates from incoming enrollees. While issuers generally appear to have complied with this requirement, some suggest that a more limited requirement, such as issuing the certificates only to consumers who request them, would serve the same purpose for less cost. National Association of Insurance Commissioners (NAIC) is concerned that if large numbers of older and less healthy individuals remain in the individual market, premiums for all individuals there could rise as a result. HIPAA's guaranteed renewal requirements may also preclude issuers from canceling enrollees' coverage, once they exceed eligibility limits, in insurance programs that are targeted for low-income populations. Therefore, these programs' limited slots could be filled by otherwise ineligible individuals. Similarly, issuers could be required to renew coverage for children-only insurance products, for children who have reached adulthood--contrary to the design and intent of these products. Finally, issuers cite some HIPAA provisions that have the potential to be abused by consumers. For example, HIPAA requires group health plans to give new enrollees or enrollees switching between plans during an open enrollment period full credit for a broad range of prior health coverage. Since the law does not recognize differences in deductible levels, issuers and regulators are concerned that individuals may enroll in inexpensive, high-deductible plans while healthy and then switch to plans with comprehensive, low-deductible coverage when they become ill. Federal agencies have sought comments from industry on this matter. In a related example, because HIPAA does not permit pregnancy to be excluded from coverage as a preexisting condition, an individual could avoid the expense of health coverage and then enroll in the employer's group plan as a late enrollee to immediately obtain full maternity benefits. Issuers contend that such abuses, if widespread, could increase the cost of insurance. State regulators have encountered difficulties implementing HIPAA provisions in instances in which federal regulations lacked sufficient clarity. Specifically, some regulators are concerned that the lack of clarity may result in various interpretations and in confusion among the many entities involved in implementation. For example, Colorado insurance regulators surveyed carriers in that state to determine how they interpreted regulations pertaining to group-to-individual guaranteed access. The survey results indicated that issuers had a difficult time interpreting the regulations and were thus applying them differently. discussed earlier, the ambiguity in the risk-spreading requirement for products available to HIPAA-eligible individuals has been cited as a factor contributing to high rates for these products, which in some states range from 140 to 600 percent or more of standard rates. Other areas in which state insurance regulators have sought additional federal guidance or clarification include use of plan benefit structure as a de facto preexisting condition exclusion period, treatment of late enrollees, market withdrawal as an exception to guaranteed renewability, and nondiscrimination provisions under group plans. Federal agency officials point to a number of factors that may explain the perceived lack of clarity or detail in some regulatory guidance. First, the statute, signed into law on August 21, 1996, required that implementing regulations be issued in less than 8 months, on April 1, 1997. Implicitly recognizing this challenge, the Congress provided for the issuance of regulations on an interim final basis. This time-saving measure helped the agencies to issue a large volume of complex regulations within the statutory deadline while also providing the opportunity to add more details or further clarify the regulations with the help of comments later received from industry and states. Therefore, some regulatory details necessarily had to be deferred until a later date. Furthermore, agency officials pointed out that in developing the regulations, they sought to balance states' need for clear and explicit regulations with the flexibility to meet HIPAA goals in a manner best suited to each state. For example, under the group-to-individual guaranteed access requirement, states were given several options for achieving compliance. While the multiple options may have contributed to confusion in some instances, differences among the state insurance markets and existing reforms suggested to agency officials that a flexible approach was in the best interest of states. In fact, according to HHS officials, states specifically requested that regulations not be too explicit in order to allow states flexibility in implementing them. Finally, some of the regulatory ambiguities derive from ambiguities existing in the statute itself. For example, regulations concerning late enrollees closely track the language from the statute. States have the option of enforcing HIPAA's access, portability, and renewability standards as they apply to fully insured group and individual health coverage. In states that do not pass laws to enforce these federal standards, HHS must perform the enforcement function. According to HHS officials, the agency as well as the Congress and others assumed HHS would generally not have to perform this role, believing instead that states would not relinquish regulatory authority to the federal government. However, five states--California, Massachusetts, Michigan, Missouri, and Rhode Island--reported they did not pass legislation to implement HIPAA's group-to-individual guaranteed access provision, among other provisions, thus requiring HHS to regulate insurance plans in these states. Preliminary information suggests that up to 17 additional states have not enacted laws to enforce one or more HIPAA provisions, potentially requiring HHS to play a regulatory role in some of these states as well. HHS resources are currently strained by its new regulatory role in the five states where enforcement is under way, according to officials, and concern exists about the implications of the possible expansion of this role to additional states. Federal officials have begun to respond to some of the concerns raised during the first year of HIPAA implementation. HHS is continuing to monitor the need for more explicit risk-spreading requirements to mitigate the high cost of guaranteed access products in the individual market under the federal fallback approach. Federal officials believe a change to the certificate issuance requirement in response to issuer concerns would be premature; the officials note that the certificates also serve to notify consumers of their portability rights, regardless of whether consumers ultimately need to use the certificate to exercise those rights. As for guaranteed renewal for Medicare eligibles, federal officials interpret HIPAA to require that individuals, upon becoming eligible for Medicare, have the option of maintaining their individual market coverage. Moreover, HHS officials disagreed with the insurance industry and state regulators' contention that sufficient numbers of individuals in poor health will remain in the individual market to affect premium prices there. nondiscrimination and late enrollment was published on December 29, 1997. This guidance clarifies how group health plans must treat individuals who, prior to HIPAA, had been excluded from coverage because of a health status-related factor. Further guidance and clarification in these and other areas is expected to follow. Finally, to address its resource constraints, HHS has shifted resources to HIPAA tasks from other activities. In its fiscal year 1999 budget request, HHS has also requested an additional $15.5 million to fund 65 new full-time-equivalent staff and outside contractor support for HIPAA-related enforcement activities. HIPAA reflects the complexity of the U.S. private health insurance marketplace. The law's standards for health coverage access, portability, and renewability apply nationwide but must take account of the distinctive features of the small-group, large-group, and individual insurance markets, and of employees' movements between these markets. From the drafting of regulations to the responses of issuers, implementation of this complex law has itself been complicated but has nonetheless moved forward. Notwithstanding this progress, though, participants and observers have raised concerns and noted challenges to those charged with implementing this law. Some challenges are likely to recede or be addressed in the near term. What could be characterized as "early implementation hurdles," especially those related to the clarity of federal regulations, may be largely resolved during 1998, as federal agencies issue further regulatory guidance to states and issuers. Moreover, as states and issuers gain experience in implementing HIPAA standards, the intensity of their dissatisfaction may diminish. In any case, while criticizing the cost and administrative burden of issuing certificates of creditable coverage, issuers still seem able to comply. According to issuers and other participants in HIPAA's implementation, HIPAA may have several unintended consequences, but predicting whether these possibilities will be realized is difficult. At this early point in the law's history, these concerns are necessarily speculative because HIPAA's insurance standards have not been in place long enough for evidence to accumulate. In addition, possible changes in the regulations or amendments to the statute itself could determine whether a concern about a provision's effects becomes reality. However, two implementation difficulties are substantive and likely to persist, unless measures are taken to address them. First, in the 13 federal fallback states, some consumers are finding that high premiums make it difficult to purchase the group-to-individual guaranteed access coverage that HIPAA requires carriers to offer. This situation is likely to continue unless HHS interprets the statute to require (in federal fallback states) more explicit and comprehensive risk-spreading requirements or that states adopt other mechanisms to moderate rates of guaranteed access coverage for HIPAA eligibles. In addition, if the range of consumer education efforts on HIPAA provisions remains limited, many consumers may continue to be surprised by the limited nature of HIPAA protections or to risk losing the opportunity to take advantage of them. Second, HHS' current enforcement capabilities could prove inadequate to handle the additional burden as the outcome of state efforts to adopt and implement HIPAA provisions becomes clearer in 1998. The situation regarding the implementation of HIPAA's insurance standards is dynamic. As additional health plans become subject to the law, and as further guidance is issued, new problems may emerge and new corrective actions may be necessary. Consequently, because a comprehensive determination of HIPAA's implementation and effects remains years away, continued oversight is required. Mr. Chairman, this concludes my prepared statement. I will be happy to answer your questions. To achieve its goals of improving the access, portability, and renewability of private health insurance, HIPAA sets forth standards that variously apply to the individual, small-group, and large-group markets of all states. Most HIPAA standards became effective on July 1, 1997. However, the certificate issuance standard became effective on June 1, 1997, and issuers had to provide certificates automatically to all disenrollees from that point forward as well as upon request to all disenrollees retroactive to July 1, 1996. In states that chose an alternative mechanism approach, the individual market guarantee access standard (often called "group-to-individual portability") had until January 1, 1998, to become effective. Finally, group plans do not become subject to the applicable standards until their first plan year beginning on or after July 1, 1997. Table I.1 summarizes HIPAA's health coverage access, portability, and renewability standards, by applicable market segment. The text following the table describes each standard. Small group (2-50 employees) Limitations on preexisting condition exclusion periodsCredit for prior coverage (portability) N/A = not applicable. HIPAA requires issuers of health coverage to provide certificates of creditable coverage to enrollees whose coverage terminates. The certificates must document the period during which the enrollee was covered so that a subsequent health issuer can credit this time against its preexisting condition exclusion period. The certificates must also document any period during which the enrollee applied for coverage but was waiting for coverage to take effect--the waiting period--and must include information on an enrollee's dependents covered under the plan. In the small-group market, carriers must make all plans available and issue coverage to any small employer that applies, regardless of the group's claims history or health status. Under individual market guaranteed access--often referred to as group-to-individual portability--eligible individuals must have guaranteed access to at least two different coverage options. Generally, eligible individuals are defined as those with at least 18 months of prior group coverage who meet several additional requirements. Depending on the option states choose to implement this requirement, coverage may be provided by carriers or under state high-risk insurance pool programs, among others. HIPAA requires that all health plan policies be renewed regardless of health status or claims experience of plan participants, with limited exceptions. Exceptions include cases of fraud, failure to pay premiums, enrollee movement out of a plan service area, cessation of membership in an association that offers a health plan, and withdrawal of a carrier from the market. Group plan issuers may deny, exclude, or limit an enrollee's benefits arising from a preexisting condition for no more than 12 months following the effective date of coverage. A preexisting condition is defined as a condition for which medical advice, diagnosis, care, or treatment was received or recommended during the 6 months preceding the date of coverage or the first day of the waiting period for coverage. Pregnancy may not be considered a preexisting condition, nor can preexisting conditions be imposed on newborn or adopted children in most cases. Group plan issuers may not exclude a member within the group from coverage on the basis of the individual's health status or medical history. Similarly, the benefits provided, premiums charged, and employer contributions to the plan may not vary within similarly situated groups of employees on the basis of health status or medical history. Issuers of group coverage must credit an enrollee's period of prior coverage against their preexisting condition exclusion period. Prior coverage must have been consecutive, with no breaks of more than 63 days, to be creditable. For example, an individual who was covered for 6 months who changes employers may be eligible to have the subsequent employer's plan's 12-month waiting period for preexisting conditions reduced by 6 months. Time spent in a prior health plan's waiting period cannot count as part of a break in coverage. Individuals who do not enroll for coverage in a group plan during their initial enrollment opportunity may be eligible for a special enrollment period later if they originally declined to enroll because they had other coverage, such as coverage under COBRA, or were covered as a dependent under a spouse's coverage and later lost that coverage. In addition, if an enrollee has a new dependent as a result of a birth or adoption or through marriage, the enrollee and dependents may become eligible for coverage during a special enrollment period. HIPAA also includes certain other standards that relate to private health coverage, including limited expansions of COBRA coverage rights; new disclosure requirements for ERISA plans; and, to be phased in through 1999, new uniform claims and enrollee data reporting requirements. Changes to certain tax laws authorize federally tax-advantaged medical savings accounts for small employer and self-employed plans. Finally, although not included as part of HIPAA but closely related, new standards for mental health and maternity coverage became effective on January 1, 1998. Health Insurance Standards: New Federal Law Creates Challenges for Consumers, Insurers, Regulators (GAO/HEHS-98-67, Feb. 25, 1998). Medical Savings Accounts: Findings From Insurer Survey (GAO/HEHS-98-57, Dec. 19, 1997). The Health Insurance Portability and Accountability Act of 1996: Early Implementation Concerns (GAO/HEHS-97-200R, Sept. 2, 1997). Private Health Insurance: Continued Erosion of Coverage Linked to Cost Pressures (GAO/HEHS-97-122, July 24, 1997). Employment-Based Health Insurance: Costs Increase and Family Coverage Decreases (GAO/HEHS-97-35, Feb. 24, 1997). Private Health Insurance: Millions Relying on Individual Market Face Cost and Coverage Trade-Offs (GAO/HEHS-97-8, Nov. 25, 1996). Health Insurance Regulation: Varying State Requirements Affect Cost of Insurance (GAO/HEHS-96-161, Aug. 19, 1996). Health Insurance for Children: Private Insurance Coverage Continues to Deteriorate (GAO/HEHS-96-129, June 17, 1996). Health Insurance Portability: Reform Could Ensure Continued Coverage for Up to 25 Million Americans (GAO/HEHS-95-257, Sept. 19, 1995). Health Insurance Regulation: National Portability Standards Would Facilitate Changing Health Plans (GAO/HEHS-95-205, July 18, 1995). The Employee Retirement Income Security Act of 1974: Issues, Trends, and Challenges for Employer-Sponsored Health Plans (GAO/HEHS-95-167, June 21, 1995). Health Insurance Regulation: Variation in Recent State Small Employer Health Insurance Reforms (GAO/HEHS-95-161FS, June 12, 1995). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. 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Pursuant to a congressional request, GAO discussed the implementation of the private insurance market provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). GAO noted that: (1) although HIPAA gives people losing coverage a guarantee of access to coverage in the individual market, consumers attempting to exercise this right have been hindered in some states by carrier practices and pricing and by their own misunderstanding of this complex law; (2) in the 13 states using the federal fallback approach to guaranteed access, some carriers initially discouraged people from applying for the coverage or charge them as much as 140 to 600 percent of the standard rate; (3) many consumers also do not fully understand the eligibility criteria that apply and as a result may risk losing their right to coverage; (4) issuers of health coverage believe certain HIPAA provisions are burdensome to administer, may create unintended consequences, or may be abused by consumers; (5) issuers also fear that HIPAA's guaranteed renewal provision could cause those eligible for Medicare to pay for redundant coverage and hinder carriers' ability to sell products to children and other targeted populations; (6) certain protections for group plan enrollees may create an opportunity for consumer abuse, such as the guarantees of credit for prior coverage, which could give certain enrollees an incentive, when they need medical care, to switch from low-cost, high-deductible coverage to more expensive, low-deductible coverage; (7) state insurance regulators have encountered difficulties implementing and enforcing HIPAA provisions where federal guidance lacks sufficient clarity or detail; (8) federal regulators face an unexpectedly large role under HIPAA, which could strain the Department of Health and Human Service's (HHS) resources and weaken its oversight; (9) in states that do not pass legislation implementing HIPAA provisions, HHS is required to take on the regulatory role; (10) as federal agencies issue more guidance and states and issuers gain more experience with HIPAA, concerns about the clarity of its regulations may diminish; (11) whether unintended consequences will occur is as yet unknown, in part because sufficient evidence has not accumulated; (12) in federal fallback states, premiums for group-to-individual guaranteed access coverage are likely to remain high unless regulations with more explicit risk-spreading requirements are issued at the federal or state level; (13) HHS' ability to meet its growing oversight role may prove inadequate given the current level of resources, particularly if more states cede regulatory authority to the federal government; and (14) in any case, as early challenges are resolved during 1998, other challenges to implementing HIPAA may emerge.

Although VA and DOD have shared resources at some level since the 1980s, the FHCC is the first integrated health care center with a unified governance structure, workforce, and budget.In fiscal year 2015, the FHCC provided care to about 100,000 patients at a total cost of $474 million. The Executive Agreement, signed by the Secretaries of VA, DOD, and the Navy, defines the departments' sharing relationship at the FHCC and contains key provisions to be met in 12 integration areas. (See table 1 for the key provisions in the Executive Agreement.) According to the governance structure established in the Executive Agreement, the FHCC is accountable to both VA and DOD, with VA serving as the lead department. The FHCC director, a VA executive, is accountable to VA for the fulfillment of the FHCC mission, while the deputy director, a Navy Captain who rotates approximately every 2 years, is accountable to the Navy and, ultimately, DOD. Also in accordance with the Executive Agreement, staff from the Naval Health Clinic Great Lakes and the North Chicago VA Medical Center merged to create a single, joint workforce. This included the transfer of DOD civilian staff employed by the Department of the Navy to VA's personnel system. As of November 2016, the FHCC's workforce included approximately 3482 civilian, active duty, and contract staff. Civilians comprised 69 percent (about 2396) of the facility's overall workforce, while 26 percent (about 907) were active duty servicemembers, and 5 percent (about 179) were contract staff. The NDAA 2010 established the Joint DOD-VA Medical Facility Demonstration Fund (Joint Fund) as the funding mechanism for the FHCC, with VA and DOD both making transfers to the Joint Fund from their respective appropriations. As authorized in the NDAA 2010, the Executive Agreement requires a financial reconciliation process that permits VA and DOD to identify their contributions to the Joint Fund each year. These contribution proportions are determined based on the proportion of shared care provided by each department, as well as the amount each department spent for mission-specific services provided to its beneficiaries. VA and DOD's approach for evaluating the FHCC involved both separate and joint reviews that included the identification of recommended improvements in their report to Congress. However, the report did not include time frames for implementing these improvements. Additionally, although the departments acknowledged the "very high" costs of operating the FHCC, there was no updated cost-effectiveness analysis included that would provide a baseline for measuring efficiency. VA and DOD's approach for evaluating the FHCC included conducting both separate and joint reviews to determine whether it should continue operating as an integrated facility with a unified governance structure, workforce, and budget or revert to a "joint venture." Under a joint venture arrangement, the departments would continue sharing medical facility space, but would manage their operations with separate governance structures, staff, and budgets. VA and DOD initially conducted separate reviews of the FHCC with their own subject matter teams. VA established 9 subject matter teams that began their reviews in August 2015, and DOD established 11 subject matter teams that began their reviews in June 2015. Officials told us that the issues selected for review by the subject matter teams were based on the functional areas of the FHCC, the Executive Agreement, and requirements in the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 (NDAA 2009) that provided guidelines for establishing the demonstration. According to officials, each team reviewed the following documents: the FHCC evaluation conducted by VA and DOD's contractor, the FHCC IT evaluation conducted by the Veterans Health Administration Product Effectiveness group, and other relevant reports, including reviews by GAO and the Institute of Medicine, as well as the mission and purpose of the facility. Based on their assessments, each team was asked to recommend whether the FHCC should continue as an integrated facility or revert to a joint venture. While the majority of VA's teams recommended that the FHCC should continue operating as an integrated facility, the DOD/Navy teams did not have an overall consensus. (See table 2.) According to a Navy official, the teams' recommendations were prioritized based on DOD's determination of the importance of their particular area. Specifically, recommendations of the governance and budget teams were given a higher priority than the other subject matter teams. As a result, their recommendations to continue operating the FHCC as an integrated facility had more weight in DOD's final determination. VA and DOD officials met jointly in October 2015 to determine the future of the FHCC. They reviewed the work of the subject matter teams, including the teams' recommendations related to whether the FHCC should continue operating as an integrated facility as well as specific improvements the teams recommended implementing if the FHCC continued to operate as an integrated facility. They also studied the implications of either operating the FHCC as an integrated facility or converting it to a joint venture, and concluded that the latter was not advisable or achievable for two main reasons: The former Naval Hospital Great Lakes had been demolished, and funding for the replacement facility was used to expand the former North Chicago VA Medical Center as part of the demonstration. Returning all or some of the 470 civilian employees from VA to DOD's personnel system would require complex negotiations and could result in job reclassifications and salary changes. As a result, the departments jointly recommended continuing the FHCC as an integrated facility with periodic reviews and the implementation of 17 recommended improvements that had been identified by the subject matter teams (See table 3.) Although the departments' report to Congress outlined a number of recommended improvements for the FHCC as part of their decision to continue operating it as an integrated facility, the report did not include time frames for implementing them. VA and DOD officials have been routinely tracking each of the recommended improvements through meetings held twice monthly, and have developed a spreadsheet that includes information on status and next steps. However, officials have not identified time frames as part of their routine tracking efforts. As we have previously reported, leading practices for organizational planning call for results-oriented organizations to develop comprehensive plans that provide tools to ensure accountability, among other things. Although officials have defined goals and identified activities for implementing the recommended improvements, the lack of time frames and interim milestones suggests they do not have all of the tools needed to ensure accountability. Time frames and interim milestones could be used to monitor progress, hold staff accountable for achieving desired results, and make mid-course corrections, if needed. DOD officials acknowledged that although a majority of the recommended improvements do not have this information, the timing for implementing some improvements is outside their control, such as approval and funding for IT enhancements. (See recommended improvement 14 in table 3.) Additionally, according to these officials, the recommendation to conduct an extensive review and revision of the FHCC Executive Agreement and associated executive decision memoranda to reduce redundancies will be a monumental undertaking, and until this review is under way, officials will not know how much time will be needed to complete these efforts. (See recommended improvement 2 in table 3.) Furthermore, DOD officials informed us that two of the recommended improvements do have time frames, although this is not reflected in the tracking spreadsheet. Specifically, DOD officials stated that the joint staffing study has a completion goal of February 2017, and the proposal for future funding for the FHCC is due to be presented at the April 2017 Advisory Board meeting. (See recommended improvements 6 and 10, respectively, in table 3.) Both VA and DOD officials told us that they believe their current tracking efforts of the recommended improvements are sufficient. However, without time frames and interim milestones for most of the recommended improvements, VA and DOD officials are unable to ensure that these improvements will be implemented in a timely and efficient manner. In the letter that accompanied the report to Congress, both departments acknowledged that the costs associated with the demonstration project were "very high" and not in keeping with the initial goal of delivering more cost-effective health care. The letter further noted that the increased costs were due, in part, to the departments' inability to appropriately downsize staff, as well as efforts to integrate their separate information systems. VA and DOD officials informed us that their statement about the high costs of the FHCC was based on the FHCC evaluation conducted by their contractor, Knowesis, which was referenced as an appendix in their report to Congress. Specifically, the contractor found that integration was not more cost-effective than a joint venture and that the FHCC was not consistently performing as well as the separate VA and Navy facilities were before integration. The contractor's analyses of the FHCC's cost-effectiveness used cost data that ended in fiscal year 2014. Since that time, the FHCC has had a change in leadership and has made additional improvements that VA and DOD officials believe would positively impact cost-savings. Consequently, VA and DOD officials informed us that they considered asking the contractor to update its analyses, but ultimately decided against it due to time constraints and the need to enter into a new contract as the prior one had expired. Officials also noted that although the FHCC's costs had decreased, another analysis with one additional year of data would likely not have changed the contractor's conclusions or recommendations. In addition, VA and DOD officials stated that they did not have sufficient time to conduct their own analysis with updated cost data to include in the report to Congress after receiving the contractor's final report in September 2015. Instead, officials told us they discussed the increase in costs that would occur if the integrated facility was converted into a joint venture, which would result in the establishment of duplicative services that would be less efficient than the current arrangement. For example, officials said that the facility would need to have two infection control programs and two credentialing programs that would have to be staffed accordingly, resulting in additional costs. According to OMB's capital programming guide, at many key decision points, a cost-benefit or cost-effectiveness analysis of operations would be useful to help make decisions. Additionally, based on our prior work on evaluating physical infrastructure and management consolidation initiatives, the goals and likely costs and benefits of a consolidation are key questions to consider. Without an updated cost-effectiveness analysis, VA and DOD do not know the extent to which they are achieving their initial goal of delivering more cost-effective health care. Such an analysis would provide a baseline from which to measure and track the FHCC's future efficiency, including the effect of the recommended improvements, once implemented. It may also help facilitate the identification of any additional improvements and inform other future efforts to integrate VA and DOD facilities. VA and DOD's recommendation to continue operating the FHCC as an integrated facility acknowledged the shortcomings and high costs of the demonstration and recommended not initiating similar efforts until they are able to "get it right." However, despite the departments' recommended improvements to overcome these shortcomings, deficiencies in monitoring and accountability may impede their ability to improve future operations and ensure cost efficiency. Specifically, the lack of time frames and interim milestones limits the departments' efforts to ensure the timely and efficient implementation of their recommended improvements. Additionally, without an updated cost-effectiveness analysis, the departments lack the necessary information to know to what extent they are achieving their original goal of more cost-effective care, as well as whether their recommended improvements are contributing to this goal. Until these deficiencies are addressed, the departments cannot assure whether they will actually "get it right" at the FHCC, and whether this integrated model of care could or should be replicated in the future. We recommend that the Secretaries of Veterans Affairs and Defense collaborate to take the following actions: develop time frames and interim milestones for tracking and implementing each of their jointly developed recommended improvements; and conduct a cost-effectiveness analysis for the FHCC to establish a baseline for measuring the facility's efficiency over time. VA and DOD each provided written comments on a draft of this report. In their comments, both departments concurred with our recommendations. In VA's written comments, reproduced in appendix II, VA provided additional information related to implementing each of our recommendations. Specifically, VA stated that the Veterans Health Administration would work jointly with DOD to develop time frames and milestones for the recommended improvements with a target completion date of April 2017. VA also stated that FHCC officials are working with both departments to define a methodology to conduct a cost- effectiveness analysis using existing FHCC data. Once a methodology has been defined, VA stated that FHCC officials will work with both departments to complete the analysis with a target completion date of June 2018. DOD's written comments, reproduced in appendix III, did not provide any additional information about implementing our recommendations. DOD also provided technical comments that we incorporated, as appropriate. We are sending copies of this report to the Secretary of Defense, Secretary of Veterans Affairs, and appropriate congressional committees. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix IV. The Captain James A. Lovell Federal Health Care Center's (FHCC) Executive Agreement defines the sharing relationship and roles of the Department of Veterans Affairs (VA) and Department of Defense (DOD) and contains key provisions to be met in 12 integration areas. In 2011 and 2012, we reported on the implementation status of the FHCC's Executive Agreement integration areas and made a number of recommendations. Additionally, in 2016, we reported on the ongoing difficulties that continued at the FHCC and made additional recommendations. See table 4 for our previous recommendations and the status of their implementation. In addition to the contact named above, Bonnie Anderson, Assistant Director; Danielle Bernstein, Analyst-in-Charge; Jennie Apter; and Linda Galib made key contributions to this report. Also contributing were Jacquelyn Hamilton and David Wise.

The National Defense Authorization Act for Fiscal Year 2010 (NDAA 2010) authorized VA and DOD to establish a 5-year demonstration to integrate their medical facilities in North Chicago, Ill. The NDAA 2010 also required VA and DOD to submit a report of their evaluation of the demonstration and their recommendation as to whether it should continue operating as a fully integrated facility after 5 years. In July 2016, VA and DOD submitted a report to Congress recommending that the FHCC continue operating as an integrated facility. The NDAA 2015 included a provision for GAO to assess VA and DOD's evaluation to Congress. In this report, GAO assesses VA and DOD's approach for evaluating the FHCC and making the determination to continue operating it as an integrated facility. To do this, GAO reviewed the report to Congress and relevant supporting documents, and interviewed officials about the evaluation. In analyzing the evaluation, GAO used as criteria its prior work on planning practices, evaluating physical infrastructure, and management consolidation initiatives, as well as the Office of Management and Budget's (OMB) capital programming guide. The Department of Veterans Affairs (VA) and the Department of Defense's (DOD) evaluation to determine whether the Captain James A. Lovell Federal Health Care Center (FHCC) should continue operating as an integrated facility or revert to a "joint venture" included conducting both separate and joint reviews. As an integrated facility, the FHCC has a unified governance structure, workforce, and budget. As a joint venture, the departments would continue sharing medical facility space, but would manage their operations with separate governance structures, workforces, and budgets. VA and DOD's joint review team concluded that converting the FHCC to a joint venture was not advisable or achievable because the Navy hospital had been demolished and money to replace it was used to expand the VA facility. In addition, returning the civilian employees from VA's to DOD's personnel system would require complex negotiations that could result in job reclassifications and salary changes. As a result, officials recommended continuing the FHCC as an integrated facility with the implementation of specific recommended improvements with the caveat that no similar integration efforts be undertaken until they "get it right" at the FHCC. In the report to Congress, VA and DOD outlined 17 recommended improvements for the FHCC but did not include time frames for implementing them. As GAO has previously reported, leading practices for planning call for results-oriented organizations to develop plans that provide tools to assure accountability, such as time frames and interim milestones that could be used to monitor progress, hold staff accountable for achieving desired results, and make mid-course corrections, if needed. Although officials routinely track each improvement through twice monthly meetings, and use a spreadsheet to monitor status and next steps, they have not specified time frames and interim milestones. Without this information, officials cannot ensure that they will implement the recommended improvements in a timely and efficient manner. The letter that accompanied the report to Congress stated that the FHCC's costs were "very high" and not in keeping with the initial goal of delivering more cost-effective health care. VA and DOD officials told GAO that this statement was based on their contractor's evaluation of the facility, which found that the FHCC was not more cost-effective than a joint venture. Officials told GAO that their contractor's analyses used cost data that ended in fiscal year 2014, and since that time, the FHCC has made improvements they believe would positively impact cost savings. However, officials said that they did not have sufficient time for the contractor to update the analysis after receiving the contractor's report in September 2015, and that one additional year of data would not likely have changed their conclusions or recommendations. According to OMB's capital programming guide, at many key decision points, a cost-effectiveness analysis of operations would be useful to help make decisions. Without an updated cost-effectiveness analysis for the FHCC, officials will not have a baseline from which to measure and track the FHCC's future efficiency, including the effect of the recommended improvements, once implemented. GAO recommends that the Secretaries of VA and DOD collaborate to establish time frames and interim milestones for tracking the implementation of the jointly recommended improvements and to conduct a cost-effectiveness analysis for the FHCC. VA and DOD concurred with GAO's recommendations.

The federal government is projected to invest more than $89 billion on IT in fiscal year 2017. However, as we have previously reported, investments in federal IT too often result in failed projects that incur cost overruns and schedule slippages, while contributing little to the desired mission-related outcomes. For example: The Department of Veterans Affairs' Scheduling Replacement Project was terminated in September 2009 after investing an estimated $127 million over 9 years. The tri-agency National Polar-orbiting Operational Environmental Satellite System was disbanded in February 2010 at the direction of the White House's Office of Science and Technology Policy after the program invested 16 years and almost $5 billion. The Department of Homeland Security's Secure Border Initiative Network program was ended in January 2011, after the department invested more than $1 billion to the program. The Office of Personnel Management's Retirement Systems Modernization program was canceled in February 2011, after investing approximately $231 million on the agency's third attempt to automate the processing of federal employee retirement claims. The Department of Veterans Affairs' Financial and Logistics Integrated Technology Enterprise program was intended to be delivered by 2014 at a total estimated cost of $609 million, but was terminated in October 2011 due to challenges in managing the program. The Department of Defense's Expeditionary Combat Support System was canceled in December 2012 after investing more than a billion dollars and failing to deploy within 5 years of initially obligating funds. The Farm Service Agency's Modernize and Innovate the Delivery of Agricultural Systems program, which was to replace aging hardware and software applications that process benefits to farmers, was halted in July 2014 after investing about 10 years and at least $423 million, while only delivering about 20 percent of the functionality that was originally planned. Our past work found that these and other failed IT projects often suffered from a lack of disciplined and effective management, such as project planning, requirements definition, and program oversight and governance. In many instances, agencies had not consistently applied best practices that are critical to successfully acquiring IT. Federal IT projects have also failed due to a lack of oversight and governance. Executive-level governance and oversight across the government has often been ineffective, specifically from chief information officers (CIO). For example, we reported that some CIOs' authority was limited in that not all CIOs had the authority to review and approve the entire agency IT portfolio. Our past work has also identified nine critical factors underlying successful major acquisitions that support the objective of improving the management of large-scale IT acquisitions across the federal government: (1) program officials actively engaging with stakeholders; (2) program staff having the necessary knowledge and skills; (3) senior department and agency executives supporting the programs; (4) end users and stakeholders being involved in the development of requirements; (5) end users participating in the testing of system functionality prior to end user acceptance testing; (6) government and contractor staff being stable and consistent; (7) program staff prioritizing requirements; (8) program officials maintaining regular communication with the prime contractor; and (9) programs receiving sufficient funding. Recognizing the importance of issues related to government-wide management of IT, FITARA was enacted in December 2014. The law was aimed at improving agencies' acquisitions of IT and could help enable Congress to monitor agencies' progress and hold them accountable for reducing duplication and achieving cost savings. FITARA includes specific requirements related to the acquisition of IT, such as Agency CIO authority enhancements. CIOs at covered agencies are required to (1) approve the IT budget requests of their respective agencies, (2) certify that OMB's incremental development guidance is being adequately implemented for IT investments, (3) review and approve contracts for IT, and (4) approve the appointment of other agency employees with the title of CIO. Enhanced transparency and improved risk management. OMB and covered agencies are to make detailed information on federal IT investments publicly available and agency CIOs are to categorize their IT investments by level of risk. Additionally, in the case of major IT investments rated as high risk for 4 consecutive quarters, the law requires that the agency CIO and the investment's program manager conduct a review aimed at identifying and addressing the causes of the risk. Expansion of training and use of IT acquisition cadres. Agencies are to update their acquisition human capital plans to address supporting the timely and effective acquisition of IT. In doing so, the law calls for agencies to consider, among other things, establishing IT acquisition cadres or developing agreements with other agencies that have such cadres. Government-wide software purchasing program. The General Services Administration is to develop a strategic sourcing initiative to enhance government-wide acquisition and management of software. In doing so, the law requires that, to the maximum extent practicable, the General Services Administration should allow for the purchase of a software license agreement that is available for use by all executive branch agencies as a single user. Maximizing the benefit of the federal strategic sourcing initiative. Federal agencies are required to compare their purchases of services and supplies to what is offered under the federal strategic sourcing initiative. OMB is also required to issue related regulations. In February 2015, we introduced a new government-wide high-risk area, Improving the Management of IT Acquisitions and Operations. This area highlights several critical IT initiatives in need of additional congressional oversight, including (1) reviews of troubled projects; (2) efforts to increase the use of incremental development; (3) efforts to provide transparency relative to the cost, schedule, and risk levels for major IT investments; (4) reviews of agencies' operational investments; (5) data center consolidation; and (6) efforts to streamline agencies' portfolios of IT investments. We noted that implementation of these initiatives has been inconsistent and more work remains to demonstrate progress in achieving successful IT acquisitions and operations outcomes. Further, our February 2015 high-risk report also stated that, beyond implementing FITARA, OMB and agencies needed to continue to implement our prior recommendations in order to improve their ability to effectively and efficiently invest in IT. Specifically, between fiscal years 2010 and 2015, we made 803 recommendations to OMB and federal agencies to address shortcomings in IT acquisitions and operations, including many to improve the implementation of the recent initiatives and other government-wide, cross-cutting efforts. We noted that OMB and agencies should demonstrate government-wide progress in the management of IT investments by, among other things, implementing at least 80 percent of our recommendations related to managing IT acquisitions and operations within 4 years. In February 2017, we issued an update to our high-risk series and reported that, while progress had been made in improving the management of IT acquisitions and operations, significant work still remained to be completed. For example, as of December 2016, OMB and the agencies had fully implemented 366 (or about 46 percent) of the 803 recommendations. This was a 23 percent increase compared to the percentage we reported as being fully implemented in 2015. Figure 1 summarizes the progress that OMB and the agencies have made in addressing our recommendations, as compared to the 80 percent target. In addition, in fiscal year 2016, we made 202 new recommendations, thus further reinforcing the need for OMB and agencies to address the shortcomings in IT acquisitions and operations. In addition to addressing our prior recommendations, our 2017 high-risk update also notes the importance of OMB and federal agencies continuing to expeditiously implement the requirements of FITARA. Given the magnitude of the federal government's annual IT budget, which is projected to be more than $89 billion in fiscal year 2017, it is important that agencies leverage all available opportunities to ensure that IT investments are made in the most effective manner possible. To do so, agencies can rely on key IT workforce planning activities to facilitate the success of major acquisitions. OMB has also established several initiatives to improve the acquisition of IT, including reviews of troubled IT projects, a key transparency website, and an emphasis on incremental development. However, the implementation of these efforts has been inconsistent and more work remains to demonstrate progress in achieving successful IT acquisition outcomes. An area where agencies can improve their ability to acquire IT is workforce planning. In November 2016, we reported that IT workforce planning activities, when effectively implemented, can facilitate the success of major acquisitions. As stated earlier, ensuring program staff have the necessary knowledge and skills is a factor commonly identified as critical to the success of major investments. If agencies are to ensure that this critical success factor has been met, then IT skill gaps need to be adequately assessed and addressed through a workforce planning process. In this regard, we reported that four workforce planning steps and eight key activities can assist agencies in assessing and addressing IT knowledge and skill gaps. Specifically, these four steps are: (1) setting the strategic direction for IT workforce planning, (2) analyzing the workforce to identify skill gaps, (3) developing and implementing strategies to address IT skill gaps, and (4) monitoring and reporting progress in addressing skill gaps. Each of the four steps is supported by key activities (as summarized in table 1). However, in our November 2016 report, we determined that five agencies that we selected for in-depth analysis had not fully implemented key workforce planning steps and activities. For example, four of these agencies had not demonstrated an established IT workforce planning process. In addition, none of these agencies had fully assessed their workforce competencies and staffing needs regularly or established strategies and plans to address gaps in these areas. Figure 2 illustrates the extent to which the five selected agencies had fully, partially, or not implemented key IT workforce planning activities. The weaknesses identified were due, in part, to these agencies lacking comprehensive policies that required such activities, or failing to apply the policies to IT workforce planning. We concluded that, until these weaknesses are addressed, the five agencies risk not adequately assessing and addressing gaps in knowledge and skills that are critical to the success of major acquisitions. Accordingly, we made recommendations to each of the five selected agencies to address the weaknesses in their IT workforce planning practices that we identified. Four agencies--the Departments of Commerce, Health and Human Services, Transportation, and Treasury--agreed with our recommendations and one, the Department of Defense, partially agreed. In January 2010, the Federal CIO began leading TechStat sessions-- face-to-face meetings to terminate or turn around IT investments that are failing or are not producing results. These meetings involve OMB and agency leadership and are intended to increase accountability and transparency and improve performance. OMB reported that federal agencies achieved over $3 billion in cost savings or avoidances as a result of these sessions in 2010. Subsequently, OMB empowered agency CIOs to hold their own TechStat sessions within their respective agencies. In June 2013, we reported that, while OMB and selected agencies continued to hold additional TechStats, more OMB oversight was needed to ensure that these meetings were having the appropriate impact on underperforming projects. Specifically, OMB reported conducting TechStats at 23 federal agencies covering 55 investments, 30 of which were considered medium or high risk at the time of the TechStat. However, these reviews accounted for less than 20 percent of medium- or high-risk investments government-wide. As of August 2012, there were 162 such at-risk investments across the government. Further, we reviewed four selected agencies and found they had held TechStats on 28 investments. While these reviews were generally conducted in accordance with OMB guidance, we found that areas for improvement existed. For example, these agencies did not consistently create memorandums with responsible parties and due dates for action items. We concluded that, until these agencies fully implemented OMB's TechStat guidance, they may not be positioned to effectively manage and resolve problems on IT investments. In addition, we noted that, until OMB and agencies develop plans and schedules to review medium- and high- risk investments, the investments would likely remain at risk. Among other things, we recommended that OMB require agencies to conduct TechStats for each IT investment rated with a moderately high- or high- risk rating, unless there is a clear reason for not doing so. OMB generally agreed with this recommendation. However, when we testified on this issue slightly more than 2 years later in November 2015, we found that OMB had only conducted one TechStat review between March 2013 and October 2015. In addition, we noted that OMB had not listed any savings from TechStats in any of its required quarterly reporting to Congress since June 2012. This issue continues to be a concern and, in January 2017, the Federal CIO Council issued a report titled the State of Federal Information Technology, which noted that while early TechStats saved money and turned around underperforming investments it was unclear if OMB had performed any TechStats in recent years. To facilitate transparency across the government in acquiring and managing IT investments, OMB established a public website--the IT Dashboard--to provide detailed information on major investments at 26 agencies, including ratings of their performance against cost and schedule targets. Among other things, agencies are to submit ratings from their CIOs, which, according to OMB's instructions, should reflect the level of risk facing an investment relative to that investment's ability to accomplish its goals. In this regard, FITARA includes a requirement for CIOs to categorize their major IT investment risks in accordance with OMB guidance. Over the past 6 years, we have issued a series of reports about the IT Dashboard that noted both significant steps OMB has taken to enhance the oversight, transparency, and accountability of federal IT investments by creating its IT Dashboard, as well as issues with the accuracy and reliability of data. In total, we have made 47 recommendations to OMB and federal agencies to help improve the accuracy and reliability of the information on the IT Dashboard and to increase its availability. Most agencies have agreed with our recommendations. Most recently, in June 2016, we determined that 13 of the 15 agencies selected for in-depth review had not fully considered risks when rating their major investments on the IT Dashboard. Specifically, our assessments of risk for 95 investments at 15 selected agencies matched the CIO ratings posted on the Dashboard 22 times, showed more risk 60 times, and showed less risk 13 times. Figure 3 summarizes how our assessments compared to the selected investments' CIO ratings. Aside from the inherently judgmental nature of risk ratings, we identified three factors which contributed to differences between our assessments and the CIO ratings: Forty of the 95 CIO ratings were not updated during the month we reviewed, which led to more differences between our assessments and the CIOs' ratings. This underscores the importance of frequent rating updates, which help to ensure that the information on the Dashboard is timely and accurately reflects recent changes to investment status. Three agencies' rating processes spanned longer than 1 month. Longer processes mean that CIO ratings are based on older data, and may not reflect the current level of investment risk. Seven agencies' rating processes did not focus on active risks. According to OMB's guidance, CIO ratings should reflect the CIO's assessment of the risk and the investment's ability to accomplish its goals. CIO ratings that do not incorporate active risks increase the chance that ratings overstate the likelihood of investment success. As a result, we concluded that the associated risk rating processes used by the 15 agencies were generally understating the level of an investment's risk, raising the likelihood that critical federal investments in IT are not receiving the appropriate levels of oversight. To better ensure that the Dashboard ratings more accurately reflect risk, we recommended that the 15 agencies take actions to improve the quality and frequency of their CIO ratings. Twelve agencies generally agreed with or did not comment on the recommendations and three agencies disagreed, stating their CIO ratings were adequate. However, we noted that weaknesses in their processes still existed and that we continued to believe our recommendations were appropriate. OMB has emphasized the need to deliver investments in smaller parts, or increments, in order to reduce risk, deliver capabilities more quickly, and facilitate the adoption of emerging technologies. In 2010, it called for agencies' major investments to deliver functionality every 12 months and, since 2012, every 6 months. Subsequently, FITARA codified a requirement that agency CIOs certify that IT investments are adequately implementing OMB's incremental development guidance. In May 2014, we reported that 66 of 89 selected investments at five major agencies did not plan to deliver capabilities in 6-month cycles, and less than half of these investments planned to deliver functionality in 12-month cycles. We also reported that only one of the five agencies had complete incremental development policies. Accordingly, we recommended that OMB develop and issue clearer guidance on incremental development and that the selected agencies update and implement their associated policies. Four of the six agencies agreed with our recommendations or had no comments; the remaining two agencies partially agreed or disagreed with the recommendations. The agency that disagreed with our recommendation stated that it did not believe that its recommendation should be dependent on OMB first taking action. However, we noted that our recommendation does not require OMB to take action first and that we continued to believe our recommendation was warranted and could be implemented. Subsequently, in August 2016, we reported that agencies had not fully implemented incremental development practices for their software development projects. Specifically, we noted that, as of August 31, 2015, 22 federal agencies had reported on the IT Dashboard that 300 of 469 active software development projects (approximately 64 percent) were planning to deliver usable functionality every 6 months for fiscal year 2016, as required by OMB guidance. Regarding the remaining 169 projects (or 36 percent) that were reported as not planning to deliver functionality every 6 months, agencies provided a variety of explanations for not achieving that goal. These included project complexity, the lack of an established project release schedule, or that the project was not a software development project. Table 2 lists the total number and percent of federal software development projects for which agencies reported plans to deliver functionality every 6 months for fiscal year 2016. In conducting an in-depth review of seven selected agencies' software development projects, we determined that 45 percent of the projects delivered functionality every 6 months for fiscal year 2015 and 55 percent planned to do so in fiscal year 2016. Agency officials reported that management and organizational challenges and project complexity and uniqueness had impacted their ability to deliver incrementally. We concluded that it was critical that agencies continue to improve their use of incremental development to deliver functionality and reduce the risk that these projects will not meet cost, schedule, and performance goals. In addition, while OMB had issued guidance requiring covered agency CIOs to certify that each major IT investment's plan for the current year adequately implements incremental development, only three agencies (the Departments of Commerce, Homeland Security, and Transportation) had defined processes and policies intended to ensure that the department CIO certifies that major IT investments are adequately implementing incremental development. Officials from three other agencies (the Departments of Education, Health and Human Services, and the Treasury) reported that they were in the process of updating their existing incremental development policy to address certification, while the Department of Defense's policies that address incremental development did not include information on CIO certification. We concluded that until all of the agencies we reviewed define processes and policies for the certification of the adequate use of incremental development, they will not be able to fully ensure adequate implementation of, or benefit from, incremental development practices. Accordingly, we recommended that four agencies establish a policy and process for the certification of major IT investments' adequate use of incremental development. The Departments of Education and Health and Human Services agreed with our recommendation, while the Department of Defense disagreed and stated that its existing policies address the use of incremental development. However, we noted that the department's policies did not comply with OMB's guidance and that we continued to believe our recommendation was appropriate. The Department of the Treasury did not comment on the recommendation. In conclusion, with the enactment of FITARA, the federal government has an opportunity to improve the transparency and management of IT acquisitions, and to strengthen the authority of CIOs to provide needed direction and oversight. In addition to implementing FITARA, applying key IT workforce planning practices could improve the agencies' ability to assess and address gaps in knowledge and skills that are critical to the success of major acquisitions. Further, continuing to implement key OMB initiatives can help to improve the acquisition of IT. For example, conducting additional TechStat reviews can help focus management attention on troubled projects and provide a mechanism to establish clear action items to improve project performance or terminate the investment. Additionally, improving the assessment of risks when agencies rate major investments on the IT Dashboard would likely provide greater transparency and oversight of the government's billions of dollars in IT investments. Lastly, increasing the use of incremental development approaches could improve the likelihood that major IT investments meet cost, schedule, and performance goals. Chairmen Hurd and Meadows, Ranking Members Kelly and Connolly, and Members of the Subcommittees, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staffs have any questions about this testimony, please contact me at (202) 512-9286 or at [email protected]. Individuals who made key contributions to this testimony are Dave Hinchman (Assistant Director), Chris Businsky, Rebecca Eyler, and Jon Ticehurst (Analyst in Charge). High-Risk Series: Progress on Many High-Risk Areas, While Substantial Efforts Needed on Others. GAO-17-317. Washington, D.C.: February 15, 2017. IT Workforce: Key Practices Help Ensure Strong Integrated Program Teams; Selected Departments Need to Assess Skill Gaps. GAO-17-8. Washington, D.C.: November 30, 2016. Information Technology Reform: Agencies Need to Increase Their Use of Incremental Development Practices. GAO-16-469. Washington, D.C.: August 16, 2016. IT Dashboard: Agencies Need to Fully Consider Risks When Rating Their Major Investments. GAO-16-494. Washington, D.C.: June 2, 2016. High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February 11, 2015. Information Technology: Agencies Need to Establish and Implement Incremental Development Policies. GAO-14-361. Washington, D.C.: May 1, 2014. IT Dashboard: Agencies Are Managing Investment Risk, but Related Ratings Need to Be More Accurate and Available. GAO-14-64. Washington, D.C.: December 12, 2013. Information Technology: Additional Executive Review Sessions Needed to Address Troubled Projects. GAO-13-524. Washington, D.C.: June 13, 2013. IT Dashboard: Opportunities Exist to Improve Transparency and Oversight of Investment Risk at Select Agencies. GAO-13-98. Washington, D.C.: October 16, 2012. IT Dashboard: Accuracy Has Improved, and Additional Efforts Are Under Way to Better Inform Decision Making. GAO-12-210. Washington, D.C.: November 7, 2011. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The federal government is projected to invest more than $89 billion on IT in fiscal year 2017. Historically, these investments have frequently failed, incurred cost overruns and schedule slippages, or contributed little to mission-related outcomes. Accordingly, in December 2014, IT reform legislation was enacted, aimed at improving agencies' acquisitions of IT. Further, in February 2015, GAO added improving the management of IT acquisitions and operations to its high-risk list. This statement focuses on the status of federal efforts in improving the acquisition of IT. Specifically, this statement summarizes GAO's prior work primarily published between June 2013 and February 2017 on (1) key IT workforce planning activities, (2) risk levels of major investments as reported on OMB's IT Dashboard, and (3) implementation of incremental development practices, among other issues. The Federal Information Technology Acquisition Reform Act (FITARA) was enacted in December 2014 to improve federal information technology (IT) acquisitions and can help federal agencies reduce duplication and achieve cost savings. Successful implementation of FITARA will require the Office of Management and Budget (OMB) and federal agencies to take action in a number of areas identified in the law and as previously recommended by GAO. IT workforce planning. GAO identified eight key IT workforce planning practices in November 2016 that are critical to ensuring that agencies have the knowledge and skills to successfully acquire IT, such as analyzing the workforce to identify gaps in competencies and staffing. However, GAO reported that the five selected federal agencies it reviewed had not fully implemented these practices. For example, none of these agencies had fully assessed their competency and staffing needs regularly or established strategies and plans to address gaps in these areas. These weaknesses were due, in part, to agencies lacking comprehensive policies that required these practices. Accordingly, GAO made specific recommendations to the five agencies to address the practices that were not fully implemented. Four agencies agreed and one partially agreed with GAO's recommendations. IT Dashboard. To facilitate transparency into the government's acquisition of IT, OMB's IT Dashboard provides detailed information on major investments at federal agencies, including ratings from Chief Information Officers (CIO) that should reflect the level of risk facing an investment. GAO reported in June 2016 that 13 of the 15 agencies selected for in-depth review had not fully considered risks when rating their investments on the IT Dashboard. In particular, of the 95 investments reviewed, GAO's assessments of risks matched the CIO ratings 22 times, showed more risk 60 times, and showed less risk 13 times. Several factors contributed to these differences, such as CIO ratings not being updated frequently and using outdated risk data. GAO recommended that agencies improve the quality and frequency of their ratings. Most agencies agreed with GAO's recommendations. Incremental development. An additional reform initiated by OMB has emphasized the need for federal agencies to deliver investments in smaller parts, or increments, in order to reduce risk and deliver capabilities more quickly. Specifically, since 2012, OMB has required investments to deliver functionality every 6 months. In August 2016, GAO determined that, for fiscal year 2016, 22 agencies had reported on the IT Dashboard that 64 percent of their software development projects would deliver useable functionality every 6 months. However, GAO determined that only three of seven agencies selected for in-depth review had policies regarding the CIO certifying IT investments' adequate implementation of incremental development, as required by OMB. GAO recommended, among other things, that four agencies improve their policies for CIO certification of incremental development. Most of these agencies agreed with the recommendations. Between fiscal years 2010 and 2015, GAO made 803 recommendations to OMB and federal agencies to address shortcomings in IT acquisitions and operations. The significance of these recommendations contributed to the addition of this area to GAO's high-risk list. As of December 2016, OMB and the agencies had fully implemented 366 (or about 46 percent) of the 803 recommendations. In fiscal year 2016, GAO made 202 new recommendations, thus further reinforcing the need for OMB and agencies to address the shortcomings GAO has identified.

Oceangoing cargo containers have an important role in the movement of cargo between global trading partners. Approximately 90 percent of the world's trade is transported in cargo containers. In the United States almost half of incoming trade (by value) arrives by containers aboard ships. If terrorists smuggled a weapon of mass destruction into the nation using a cargo container and detonated such a weapon at a seaport, the incident could cause widespread death and damage to the immediate area, perhaps shut down seaports nationwide, cost the U.S. economy billions of dollars, and seriously hamper international trade. The Department of Homeland Security and CBP are responsible for addressing the threat posed by terrorist smuggling of weapons in oceangoing containers. To carry out this responsibility, CBP uses a layered security strategy. One key element of this strategy is ATS. CBP uses ATS to review documentation, including electronic manifest information submitted by the ocean carriers on all arriving shipments, to help identify containers for additional inspection. CBP requires the carriers to submit manifest information 24 hours prior to a United States-bound sea container being loaded onto a vessel in a foreign port. ATS is a complex mathematical model that uses weighted rules that assign a risk score to each arriving shipment in a container based on manifest information. As previously discussed, CBP officers use these scores to help them make decisions on the extent of documentary review or physical inspection to be conducted. ATS is an important part of other layers in the security strategy. Under its CSI program, CBP places staff at designated foreign seaports to work with foreign counterparts to identify and inspect high-risk containers for weapons of mass destruction before they are shipped to the United States. At these foreign seaports, CBP officials use ATS to help target shipments for inspection by foreign customs officials prior to departing for the United States. Approximately 73 percent of cargo containers destined for the United States originate in or go through CSI ports. ATS is also an important factor in the Customs-Trade Partnership Against Terrorism (C-TPAT) program. C-TPAT is a cooperative program linking CBP and members of the international trade community in which private companies agree to improve the security of their supply chains in return for a reduced likelihood that their containers will be inspected. Specifically, C-TPAT members receive a range of benefits, some of which could change the ATS risk characterization of their shipments, thereby reducing the probability of extensive documentary and physical inspection. CBP does not yet have key controls in place to provide reasonable assurance that ATS is effective at targeting oceangoing cargo containers with the highest risk of containing smuggled weapons of mass destruction. To address this shortcoming, CBP is (1) developing and implementing performance metrics to measure the effectives of ATS, (2) planning to compare the results of randomly conducted inspections with the results of its ATS inspections, (3) developing and implementing a simulation and testing environment, and (4) addressing recommendations contained in a 2005 peer review. To date, none of these control activities have been fully completed or implemented. Thus, CBP does not yet have key internal controls in place to be reasonably certain that ATS is providing the best available information to allocate resources for targeting and inspecting containers that are the highest risk and thus not overlook inspecting containers that pose a high threat to the nation. CBP does not yet have performance measures in place to help it determine the effectiveness of ATS at targeting oceangoing cargo containers with the highest risk of smuggled weapons of mass destruction. The Comptroller General's internal control standards include the establishment and review of performance measures as one example of a control activity to help an entity ensure it is achieving effective results. In July 2005, CBP contracted with a consulting firm to develop such performance metrics. CBP officials and personnel from this consulting firm told us that the firm's personnel analyzed shipment information in ATS over a 2-year period to obtain additional insights into ATS's performance and to determine whether ATS is more effective at targeting cargo containers for terrorism related risk than a random sampling inspection approach. CBP officials told us that the consulting firm's personnel prepared a draft of the results of their analyses and that, as of March 21, 2006, CBP officials are reviewing these analyses. They also said that the consulting firm's personnel are documenting the methodology for their analyses and related performance measures that CBP can use in the future. CBP officials expect to receive this methodology and the performance measures in April 2006, and told us that they expect to begin using the measures in June 2006. CBP officials also told us that they initially planned to have performance measures developed by August 31, 2005, but that this process has taken longer than expected because of delays in (1) obtaining security clearances for the consulting firm's personnel, (2) obtaining workspace for the firm's staff, and (3) arranging for the appropriate levels of access to CBP's information systems. Currently, CBP is not using the results of its random sampling program to assess the effectiveness of ATS. As part of its Compliance Measurement Program, CBP plans to randomly select 30,000 shipments based on entry information submitted by the trade community and examine those shipments to ensure compliance with supply chain security during fiscal year 2006. At this time, CBP is unable to compare the examination results from its random sampling program with its ATS inspection results, as we recommended in our 2004, report because CBP does not yet have an integrated, comprehensive system in place to compare multiple sets of data--like results of random inspections with results of routine ATS inspections that were triggered by ATS scores and other operational circumstances. Such a comparison would allow examination of if and why the outcomes of ATS's weighted rule sets are not consistent with the expected outcomes possible in the universe of cargo containers, based on sample projections. Furthermore, the Comptroller General's standards for internal control state that information should be recorded and communicated to management and others within the entity who need it in a form that enables them to carry out their responsibilities. Currently, CBP does not conduct simulated events (e.g., covert tests and computer-generated simulations)--a key control activity--to test and validate the effectiveness of ATS in targeting oceangoing cargo containers with the highest risk of containing smuggled weapons of mass destruction and has not yet implemented a dedicated simulation and testing environment. Without testing and validation, CBP lacks a vital mechanism for evaluating ATS's ability to identify high-risk containers. In July 2005, CBP contracted with a consulting firm to obtain assistance in the development of a computer-generated simulation and testing environment. CBP officials report that they have the simulation environment infrastructure in place and have processed mock manifest data to simulate cargo linked to terrorism in the new environment. CBP is currently reviewing the results of this test. Further, CBP officials told us that the consulting firm is continuing to work with CBP to develop system requirements so that officers can effectively use the simulation environment. CBP expects to receive the consulting firm's final input for the simulation and testing environment by June 2006. CBP officials said that they cannot estimate when this simulation and testing environment will be fully operational until CBP receives the consulting firm's final product. As with the development of performance measures, CBP officials also told us that this process has taken longer than expected because of delays in (1) obtaining security clearances for the consulting firm's personnel, (2) obtaining workspace for the firm's staff, and (3) arranging for the appropriate levels of access to CBP's information systems. As we reported in 2004, terrorism experts suggested that testing ATS by covertly simulating a realistic event using probable methods of attack would give CBP an opportunity to examine how ATS would perform in an actual terrorist situation. CBP officials told us that although they are considering implementing this kind of practice, they do not currently have a program in place to conduct such tests. The Director of CBP's Management Inspections and Integrity Assurance office told us that in mid-April 2006, his office will be presenting a proposal to the Acting Commissioner and other senior management to request initiation of a program to conduct testing of the CSI program that will include testing ATS to help ensure that it is appropriately targeting the highest-risk cargo in the CSI program. In response to our 2004 recommendation that CBP initiate an external peer review of ATS, CBP contracted with a consulting firm to evaluate CBP's targeting methodology and recommend improvements. Specifically, the contractor identified strengths of the CBP targeting methodology and compared ATS with other targeting methodologies. However, the peer review did not evaluate the overall effectiveness of ATS because CBP did not have the systems in place to allow the contractor to do so. The contractor's final report, issued in April 2005, identified many strengths in the ATS targeting methodology, such as a very capable and highly dedicated team and the application of a layered approach to targeting. It also made several recommendations to improve the targeting methodology that included control activities, such as (1) the development of performance measures, (2) the development of a simulation and testing environment, (3) the development and implementation of a structured plan for continual rules enhancement, and (4) an evaluation and determination of the effectiveness of the ATS targeting rules, several of which reinforced the recommendations we made in our 2004 report. CBP issued a detailed plan, which projected delivery dates, for responding to the recommendations made in the contractor's final report. However, about half of these dates have not been met. For example, CBP projected that it would have its testing and simulation environment in place by September 30, 2005. Although CBP has been working on this effort, the environment has not yet been implemented. As previously discussed, CBP officials said that they cannot provide a current estimate of when this simulation and testing environment will be fully operational. CBP strives to refine ATS to include intelligence information it acquires and feedback it receives from its targeting officers at the seaports, but it is not able to systematically adjust ATS for inspection results. CBP does not have a comprehensive, integrated system in place to report details on security inspections nationwide that will allow management to analyze those inspections and refine ATS. CBP officials said that they are developing a system that will allow them to do so but did not know when it will be fully operational. CBP officials cautioned that because an inspection does not identify any contraband or a weapon of mass destruction or its components, it may not necessarily indicate that a particular rule is not operating as intended. They noted that terrorist incidents may happen infrequently, and the rule therefore might operate only when weapons, materials, or other dangerous contraband is actually shipped. However, without analyzing and using security inspection results to adjust ATS, CBP is limited in refining ATS, a fact that could hinder the effectiveness of CBP's overall targeting strategy. CBP adjusts ATS's rules and weights for targeting cargo containers for inspection in response to intelligence received on an ongoing basis. CBP's Office of Intelligence (OINT) is responsible for acquiring, reviewing, analyzing, and disseminating intelligence. OINT officials told us they receive information from the intelligence community, which includes federal agencies such as the Central Intelligence Agency and the Federal Bureau of Investigation. According to OINT officials, OINT disseminates information to CBP's offices at the seaports to, among other things, support these offices' targeting efforts related to cargo containers. For example, the targeting officers may use information provided by OINT to search ATS for information about shipments and containers. OINT officials said they also disseminate information to CBP's senior management to inform them about risks associated with cargo containers. CBP uses intelligence information to refine its targeting of cargo containers for inspection by incorporating the intelligence information into ATS to readily identify containers whose manifest information may match or be similar to data contained in the intelligence information. CBP documentation and our observations showed that CBP headquarters personnel incorporate intelligence information into ATS by adjusting ATS's existing rules and weights and creating new rules and weights that result in a higher risk score being assigned to a container whose manifest information may match or be similar to data contained in the intelligence information. CBP officers can also conduct queries or create lookouts in ATS that will search all manifest data in the system to identify those containers whose manifest information may match or be similar to data contained in the intelligence information. Once ATS identifies these containers, CBP officers are to then designate these containers for inspection. When CBP receives credible intelligence information that requires immediate action, CBP officials also report that they can initiate a special operation to address specific concerns identified in the intelligence data. CBP officials at the six seaports we visited reported that they sometimes receive intelligence information from local sources such as state and local law enforcement. Officials at five of these seaports reported that they will use such information to help them make decisions regarding targeting efforts. Additionally, officials at five of the six seaports we visited said that if the information they receive has national implications, they will notify CBP headquarters personnel, who will make a determination regarding potential adjustments to ATS. In the late summer of 2005, CBP headquarters initiated a process to formally track its targeting officers' suggestions to enhance ATS for targeting cargo containers for inspection. Targeting officers at all six seaports we have visited are aware of the process for providing suggestions to CBP headquarters. According to documentation maintained by headquarters, CBP officers at the seaports have provided few suggestions to date. CBP headquarters officials said that although they have received few suggestions for modifying ATS, they do not believe this is an indication of ATS's effectiveness. These officials stated that overall the feedback they have received from CBP targeting officers at the seaports related to the operation and usefulness of ATS has been positive. We reviewed the report CBP uses to track these suggestions and found that since it was established, CBP headquarters has received 20 suggestions for enhancing the ATS component responsible for targeting oceangoing cargo containers for inspection. Some of these suggestions relate to modifying ATS's rules, while others focused on other aspects of ATS such as enhancing the organization and presentation of ATS screens by changing the size of an icon and the fonts or text used. CBP is not using inspection results to systematically adjust ATS for targeting cargo containers for inspection because CBP does not yet have a comprehensive, integrated system in place that can report sufficient details for analyzing inspection results. CBP officials said that although they can analyze inspection results on a case-by-case basis to identify opportunities to refine ATS, such as when an inspection results in a seizure of some type of contraband, they currently do not have a reporting mechanism in place that will allow them to view inspection results nationwide to identify patterns for systematically adjusting ATS. CBP is developing the Cargo Enforcement Reporting Tracking System (CERTS) to document, among other things, all cargo examinations so that documentation substantiating the examinations will be available for analysis by management to adjust ATS. CBP officials said they will begin testing CERTS in the spring of 2006. CBP officials told us that once testing of CERTS is complete, they will be in a better position to estimate when CERTS can be fully implemented. CBP officials cautioned that because an inspection does not identify any contraband or a weapon of mass destruction or its components, it may not necessarily indicate that a particular rule is not operating as intended. They noted that terrorist incidents may happen infrequently and the rule therefore might operate only when weapons, materials, or other dangerous contraband is actually shipped. However, without using inspection results to adjust ATS, CBP may not be targeting and inspecting containers with the highest risk of containing smuggled weapons of mass destruction. CBP has implemented a testing and certification process for its officers who complete the Sea Cargo Targeting Course that should provide better assurance of effective targeting practices. CBP has also made a good faith effort to address longshoremen's safety concerns regarding radiation emitted by nonintrusive inspection equipment. Nevertheless, it has not been able to persuade one longshoremen's union to permit changes in the procedure for staging containers to increase inspection efficiency. In our 2004 report, we recommended that CBP establish a testing and certification process for CBP staff who complete the national targeting training to provide reasonable assurance that they have sufficient expertise to perform targeting work. CBP has implemented such a testing and certification process. CBP conducted two evaluations that assessed its targeting training program--a job performance assessment and a job task analysis. With the results of these evaluations, CBP concluded that a certification component should be added to the training program and the Sea Cargo Targeting Training course content should remain unchanged. CBP officials then updated the course materials to encompass the inclusion of the certification component. In October 2004, CBP began certifying officers who successfully completed the Sea Cargo Targeting Training course. Since the establishment of the testing and certification component for the Sea Cargo Targeting Training course, CBP data indicate that it has trained and certified 278 of its officers responsible for targeting cargo as of March 24, 2006. While CBP has conducted a job performance assessment prior to the incorporation of a certification program for Sea Cargo Targeting Training, it has not yet formally assessed the impact that revised training and certification has had on officers' targeting of oceangoing cargo containers. However, a CBP official said that CBP has recently initiated planning efforts to begin such an evaluation and expects to complete the evaluation in May 2006. Nevertheless, supervisory officers from five of the six CBP offices at the seaports we visited said that the mandatory training and certification program has been beneficial. These supervisory officers told us that the training and certification improves the confidence of targeters, provides the ability for officers to improve their targeting productivity, and provides an opportunity for officers to gain a broader perspective into the targeting environment by examining passenger and outbound targeting. In our 2004 report, we discussed concerns that longshoremen had regarding the safety of driving cargo containers through the gamma ray imaging system, one type of nonintrusive inspection equipment used to examine containers to detect potential contraband or weapons of mass destruction. Because this equipment emits radiation as it takes images of the inside of cargo containers, some longshoremen expressed concerns about the health effects of this radiation. As a result of these safety concerns, the longshoremen's union representing West Coast longshoremen established a policy that prevents its members from driving containers through the gamma ray imaging system. In response, CBP altered its procedures at ports affected by this policy. For example, at some West Coast ports, CBP allows longshoremen to stage cargo containers away from the dock, in rows at port terminals, so that CBP officers can then drive the gamma ray imaging system over a group of containers. However, this procedure can be space-intensive and time-consuming compared to the procedure utilized at East and Gulf Coast ports, whereby the gamma ray imaging system machinery is operated by a CBP officer and parked in place while longshoremen drive the cargo containers through the machinery. At other West Coast ports, the longshoremen get out of the trucks after transporting the cargo containers so that CBP officials can drive the gamma ray imaging system cargo over the container. This is also time-consuming compared to the procedure utilized at the East and Gulf Coast ports. In response to our recommendation that CBP work with longshoremen to address their safety concerns, CBP engaged in two efforts: (1) establishing CBP's radiation threshold in accordance with the Nuclear Regulatory Commission's (NRC) federal guidelines for public radiation exposure and advertising this threshold to longshoremen through the unions, and (2) working with longshoremen's unions and other maritime organizations to develop public radiation tests on nonintrusive inspection equipment. Officials from the West Coast union that prohibits its members from driving through the gamma ray imaging system told us that the union is satisfied with CBP efforts to operate the gamma ray imaging system in an alternative format, to comply with the union's policy of receiving no amount of man-made radiation. Despite CBP efforts to assure this union that the amount of radiation emitted by the gamma ray imaging system is within safe levels, a union representative told us that CBP will not convince the union to change its policy unless it eliminates radiation emission from inspection equipment. - - - - - In closing, ATS is an integral part of CBP's layered security strategy. A well-functioning ATS is crucial to the effective screening of cargo containers at domestic and CSI foreign ports, as well as cargo shipped by the trade community participating in C-TPAT. While CBP is working to make improvements to ATS, our ongoing work indicates that it is not yet in a position to gauge the effectiveness of ATS. We are continuing to review CBP's plans and actions to improve ATS and will report to this subcommittee and the other requesters later this year. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact me at 202-512-8777 or at [email protected]. Debra Sebastian, Assistant Director; Chan-My J. Battcher; Lisa L. Berardi; Wayne A. Ekblad; and Jessica A. Evans made key contributions to this report. Additional assistance was provided by Frances Cook, Kathryn E. Godfrey, Nancy A. Hess, Arthur L. James, Jr., Stanley J. Kostyla, and Vanessa R. Taylor. To address each of our objectives, we met with U.S. Customs and Border Protection (CBP) officials in headquarters and six seaports including, Baltimore, Charleston, Los Angeles-Long Beach, Miami, New York- Newark, and Savannah. These seaports were selected based on the number of cargo containers arriving at the seaport and their geographic dispersion as reported by the U.S. Department of Transportation. At these locations, we also observed targeting and inspection operations. Because we did not select a random, probability sample of ports to visit, the results from these visits cannot be generalized to ports nationwide. We also spoke with CBP's contractor responsible for conducting CBP's peer review and longshoremen's union representatives. To evaluate how CBP provides assurance that the Automated Targeting System (ATS) targets the highest-risk oceangoing cargo containers for inspection, we reviewed CBP documentation and prior GAO work on performance measures. Additionally, we reviewed CBP's peer review report. To gain an understanding of CBP's random sampling program, we met with CBP officials responsible for this program and reviewed and analyzed CBP documentation, including procedures for examining the randomly selected shipments and documenting the results of the inspections completed for those shipments. We did not independently validate the reliability of CBP's targeting results. To assess how CBP adjusts ATS to respond to findings that occur during the course of its operational activities, we met with CBP officials responsible for gathering and disseminating intelligence and for incorporating intelligence into CBP's targeting operations. Further, we reviewed CBP policies and procedures on intelligence gathering and disseminating as well as intelligence received and resulting changes to ATS rules and weights. We did not assess the quality of intelligence received or the appropriateness of adjusted rules and weights. To determine how targeting officers' feedback and inspection results are used to adjust ATS rules and weights, we met with CBP officials responsible for collecting and maintaining data on suggestions provided by targeting officers and reviewed CBP data on the suggestions received over a 7 month period. Regarding inspection results, we reviewed CBP's policies and procedures for documenting inspection results. Additionally, we reviewed CBP's manuals identifying the specific details of an inspection completed and observed officers entering inspection results into the ATS findings module during our site visits. Further, during these visits, we discussed how CBP offices at the seaports may use inspection results to enhance their targeting efforts. Last, we met with CBP officials and reviewed CBP documentation on its current and planned findings module. To determine the status of recommendations from GAO's February 2004 report to (1) establish a testing and certification process for CBP staff who complete the national targeting training to provide assurance that they have sufficient expertise to perform targeting work and (2) work with longshoremen's unions to address fully their safety concerns so that the noninstrusive inspection equipment can be used to conduct inspections efficiently and safely, we reviewed and analyzed data on the number of officers trained and certified in sea cargo targeting. We also reviewed CBP's Sea Cargo Training Manual as well as CBP evaluations assessing the quality of its Sea Cargo Training course. We did not assess the quality of this training. Regarding longshoremen's union concerns, we reviewed scientific literature related to radiation safety and the Nuclear Regulatory Commission guidelines on radiation levels. We also spoke with longshoremen's representatives to discuss whether CBP had addressed their concerns since we issued our 2004 report. Last, we also met with CBP's Radiation Safety Officer to gain a further understanding of the potential risks associated with CBP's inspection equipment and actions he took to address longshoremen's concerns. We did not assess the appropriateness of radiation safety levels used by CBP. We conducted our work from October 2005 through March 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.

U.S. Customs and Border Protection's (CBP) Automated Targeting System (ATS)--a computerized model that CBP officers use as a decision support tool to help them target oceangoing cargo containers for inspection--is part of CBP's layered approach to securing oceangoing cargo. GAO reported in February 2004 on challenges CBP faced in targeting oceangoing cargo containers for inspection and testified before Congress in March 2004 about the findings in that report. The report and testimony outlined recommendations aimed at (1) better incorporating recognized modeling practices into CBP's targeting strategy, (2) periodically adjusting the targeting strategy to respond to findings that occur during the course of its operation, and (3) improving implementation of the targeting strategy. This statement for the record discusses preliminary observations from GAO's ongoing work related to ATS and GAO's 2004 recommendations addressing the following questions: (1) What controls does CBP have in place to provide reasonable assurance that ATS is effective at targeting oceangoing cargo containers with the highest risk of smuggled weapons of mass destruction? (2) How does CBP systematically analyze security inspection results and incorporate them into ATS? and (3) What steps has CBP taken to better implement the rest of its targeting strategy at the seaports? CBP has not yet put key controls in place to provide reasonable assurance that ATS is effective at targeting oceangoing cargo containers with the highest risk of containing smuggled weapons of mass destruction. To provide assurance that ATS targets the highest-risk cargo containers as intended, CBP is (1) working to develop and implement performance measures related to the targeting of cargo containers, (2) planning to compare the results of its random inspections with its ATS inspection results, (3) working to develop and implement a testing and simulation environment, and (4) addressing recommendations contained in a 2005 peer review of ATS. CBP expects to begin using performance measures in June 2006 and enter the final phase of software development for its testing and simulation environment at the same time. However, to date, none of these four initiatives has been fully implemented. Thus, CBP does not yet have key internal controls in place to be reasonably confident that ATS is providing the best information to allocate resources for targeting and inspecting containers that are the highest risk and not overlook inspecting containers that pose a threat to the nation. CBP does not yet have a comprehensive, integrated system in place to analyze security inspection results and incorporate them into ATS. CBP currently adjusts ATS based on intelligence information it receives and has initiated a process to track suggestions submitted by CBP targeting officers at the seaports for modifying ATS. However, CBP has not yet implemented plans to refine ATS based on findings from routine security inspections. Without a more comprehensive feedback system, CBP is limited in refining ATS, a fact that could hinder the overall effectiveness of the targeting strategy. CBP has taken steps to improve implementation of the targeting strategy at the seaports. It has implemented a testing and certification process for its officers who complete the Sea Cargo Targeting Course that should provide better assurance of effective targeting practices. CBP has also made a good faith effort to address longshoremen's safety concerns regarding radiation emitted by nonintrusive inspection equipment by taking actions such as working with longshoremen's unions and other maritime organization to develop public radiation tests on the nonintrusive inspection equipment. Nevertheless, CBP has not been able to persuade one longshoremen's union to permit changes in the procedure for staging containers to increase inspection efficiency at some West Coast seaports where the union's members work.

Air service in the United States is highly concentrated, with 88 percent of all passenger boardings at the 62 large- or medium-hub airports (see fig. 1). Small airports refer to small-hub, nonhub, and commercial-service nonprimary airports, each with less than 0.25 percent of all annual passenger boardings, or less than 1.8 million total boardings in 2012. Many small communities across the United States have access to the more than 450 small airports with scheduled passenger service, provided mostly by regional airlines that are under contract with mainline network airlines, like Delta Air Lines or United Airlines. The airport categories in figure 1 also determine the allocation of Airport Improvement Program (AIP) grants for airport capital improvements. FAA awarded nearly $3 billion in grants to all airports in fiscal year 2013, for safety, capacity, and environmental capital improvements. The grants offset the fees that airports charge users, so they are critical for small airports hoping to retain or attract airport users. For example, any airport with at least 10,000 passengers is assured at least $1 million in annual grant funding. The EAS program has historically provided the most direct support to small community air service. Anticipating that airlines would focus their resources on generally more profitable, high-density routes, Congress established the EAS program as part of the Airline Deregulation Act of 1978. Under the EAS program, if an airline cannot provide air service to eligible communities without incurring a loss, DOT provides an airline a subsidy to serve those communities. The program was initially enacted for 10 years, it was then extended for another 10 years, and in 1996, the 10-year time limit was removed. Congress has, over time, revised eligibility requirements, such as maximum subsidy amounts per passenger, and operating requirements, such as providing service with two-engine, two-pilot planes. The program now provides subsidies to airlines to serve small airports that are (1) at least 70 driving miles from the nearest medium- or large-hub airport, or (2) requires a per-passenger EAS subsidy less than $200 unless such point is greater than 210 miles from the nearest medium- or large-hub airport. The amount of subsidies varies by location. Operating airlines receiving the subsidies must provide direct service to a nearby medium- or large-hub airport so that passengers can connect to the national air transportation network. Our discussion of EAS in this testimony does not include communities in Alaska receiving EAS-subsidized air service since the requirements for communities in Alaska are different and are not representative of the program in the rest of the country. Congress also established SCASDP as a pilot program in 2000 in the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21), to help small communities enhance their air service. AIR-21 authorized the program for fiscal years 2002 and 2003, and subsequent legislation reauthorized the program through fiscal year 2008 and eliminated the "pilot" status of the program. Further, the FAA Modernization and Reform Act of 2012 reauthorized funding for SCASDP through fiscal year 2015. The law establishing SCASDP allows DOT considerable flexibility in implementing the program and selecting projects to be funded. Grant funds can be used to cover various projects that can be reasonably related to improving air service to the community, such as any new advertising or promotional activities, or for studies to improve air service and traffic. The law defines basic eligibility criteria and statutory priority factors, but meeting a given number of priority factors does not automatically mean DOT will select a project. SCASDP grants may be made to single communities or a consortium of communities, although no more than 40 grants may be awarded in a given year and no more than four grants each year may be given in the same state. Air service to small airports as measured by the number of flights and seats available has mostly declined since 2007, but so has service to airports of all sizes. Small airports generally serve small communities. As figure 2 shows, medium-hub, small-hub, and nonhub airports saw the largest net declines proportionally in flights and available seats since 2007, and the largest airports experienced the smallest declines. The smallest airports--commercial service nonprimary airports--experienced a slight increase in flights but a decline in available seats. Further, according to a recent Massachusetts Institute of Technology (MIT) study, 23 airports in small communities lost all service between 2007 and 2012. Airports receiving EAS-subsidized air service saw about a 20- percent increase in flights and about an 8-percent increase in available seats since 2007 as some regional airlines serving EAS communities switched to smaller aircraft. The reduced capacity for airline service in the United States since 2007 is attributable to a combination of factors, including higher costs, industry consolidation, and the last recession, which reduced demand. These and other factors also have had an effect on air service for small communities. First, the price of jet fuel more than quadrupled from 2002 through 2012 in nominal terms and endured a temporary spike where the price doubled over the 2007-2008 period. As a result of increased fuel prices, fuel costs have grown to become airlines' single largest expense at nearly 30 percent of airline operating costs in 2012. According to a study by MIT, regional aircraft--those mostly used to provide air service to small communities with between 19 and 100 seats--are 40 to 60 percent less fuel efficient than the aircraft used by their larger, mainline counterparts--those with more than 100 seats. According to the study, fuel efficiency differences can be explained largely by differences in aircraft operations, not technology, as the operating costs per passenger for regional aircraft are higher than mainline aircraft because they operate at lower load factors and are flown fewer miles over which to spread fixed costs. Second, many small communities have lost population over the last 30 years. In previous work, we have found that population movement has decreased demand for air service to small communities. Geographic areas, especially in the Midwest and Great Plains states, lost population between 1980 and 2010, as illustrated in figure 3 below. As a result, certain areas of the country are less densely populated than they were 35 years ago when Congress initiated the EAS program. For small communities located close to larger cities and larger airports, a lack of local demand can be exacerbated by passengers choosing to drive to airports in larger cities to access better service and lower fares. The effect of industry consolidation on the level of service to small communities is reflected in "capacity purchase agreements"-- agreements between mainline airlines and their regional partners. Under these agreements, a mainline airline pays the regional airline contractually agreed-upon fees for operating certain flight schedules. In recent years, according to a 2013 MIT study, mainline airlines have shifted a larger percentage of their small community service to regional airlines. However, according to another 2013 MIT study, these mainline airlines have been reducing the total amount of capacity for which they contract by eliminating previous point-to-point service between nearby smaller airports, thus, reducing the level and frequency of service provided. Two federal programs continue to support air service to small communities but also face some challenges. EAS provides subsidies to operating airlines that provide air service to eligible communities in order to maintain the service and SCASDP provides competitive grants to small communities to attract and support local air service. Subsidies provided to airlines serving EAS airports continue to increase. In 2009, we found that EAS subsidies had increased over time. Specifically, the average annual subsidy that DOT provided for EAS service per community for U.S. states, excluding Alaska, almost doubled from $1 million in 2002 to $1.9 million in 2013. In addition, the appropriations Congress made available to EAS increased from about $102 million in fiscal year 2003 to about $232 million in fiscal year 2013 (see table 1 below). According to DOT, the appropriation for the EAS program for fiscal year 2014 is $246 million. to serve those communities. However, we have found that aircraft serving airports that provide EAS service were far less full than aircraft serving airports that did not receive such assistance. In 2009, we found that planes serving airports in 2008 with EAS service were only about 37 percent full versus an industry average of about 80 percent. This was due, in part, to EAS subsidized service not having the destinations, frequency, or low fares that passengers prefer. Further, according to DOT officials, the population around some of the very small airports is too low to result in very high passenger loads. Since then, the load factor for these flights--the percentage of available seats filled by paying passengers--increased somewhat and was roughly 49 percent versus the industry average of 83 percent in 2013. This may be due, in part, to more regional airlines serving these EAS airports with smaller aircraft, as a result of changes in the EAS program that we recommended in 2009. The number of EAS communities being served by airlines with aircraft smaller than 15-seats doubled from 2009 through 2013. In 2009, 16 EAS communities were served using 9-seaters, but 32 EAS communities were served with this aircraft in 2013. Great Lakes is one of the few remaining regional airlines that flies 19-seat turboprops, while other small regional airlines such as Cape Air, SeaPort, and Air Choice One--fly smaller 9- seat aircraft not subject to some FAA rules for operating scheduled service flights.engine turboprop aircraft.) Small-hub and smaller airports are eligible for SCASDP grants provided the airport is not receiving sufficient air service or had unreasonably high airfares. Congress has provided funding for SCASDP since fiscal year 2002--ranging from a high of $20 million for fiscal years 2002 through 2005 to a low of $6 million in fiscal years 2010 through 2013. In fiscal year 2013, DOT awarded 25 grants totaling almost $11.4 million to airports in 22 states (see table 2). While funding for SCASDP is significantly less than funding for the EAS program, some small community airports depend on SCASDP grant awards as a means to stimulate economic development and attract business to the area surrounding the airport through enhanced air service. According to DOT, the appropriation for SCASDP for fiscal year 2014 is $5 million. We and others who have examined SCASDP have observed that the grant program has had limited effectiveness in helping small communities retain air service. In 2005, we found that initial SCASDP projects achieved mixed results.reported air service improvements were self-sustaining after their grant had been completed. At that time, we recommended that DOT evaluate the program again before the program was reauthorized. Specifically, about half of the airports that In response to our recommendation, the DOT Assistant Secretary for Aviation and International Affairs requested the DOT Office of Inspector General (OIG) to review the program's effectiveness in improving air service to small communities. The review included 40 grants awarded between 2002 and 2006 (excluding feasibility studies) that had been closed for 12 months or more as of March 31, 2007, and determined whether the projects could sustain themselves without continued federal financial support. The OIG found that 70 percent of the grants in the review failed to fully achieve their objectives; specifically, 50 percent of the grants were unable to achieve any of their articulated grant objectives or were unable to sustain grant benefits beyond the grant completion and 20 percent were either partially able to obtain or achieve all of their grant objectives or were voluntarily terminated. The remaining 30 percent of the grants were successful in achieving their grant objectives and sustaining the resulting benefits for at least 12 months. The OIG made recommendations to improve the grant award process by (1) giving priority to communities with better developed grant applications, (2) requiring communities requesting non-marketing grants to use a part of the funding awarded to them to implement a marketing program, and (3) evaluating the impact of the "same project limitation" on program effectiveness and seek legislative changes, if necessary. According to the OIG's report, DOT concurred with each of the recommendations and took the appropriate actions to implement them. Most recently, an academic study conducted by an MIT researcher evaluated 115 SCASDP grants from 2006 through 2011 and found that less than 40 percent of the grants met their primary objectives. On the other hand, SCASDP grants have been used to fund some successful projects. We found in 2005 and 2007 that SCASDP grantees pursued a variety of goals and strategies for supporting air service, and some of the grants resulted in successfully meeting their intended purposes.variety of project goals and strategies to improve air service to their community, including (1) adding flights, airlines, and destinations; (2) lowering fares; (3) upgrading the aircraft serving the community; (4) obtaining better data for planning and marketing air service; (5) increasing enplanements; and (6) curbing the loss of passengers to other airports. For example, our 2005 report found that 19 of the 23 completed grants resulted in some kind of improvement in service, either in terms of an added carrier, destination, flights, or change in the type of aircraft. We found these successes include grantees that identified a In 2007, we also found that a review of 59 grantees' final reports for completed projects indicated that 48 of these increased enplanements as a result of their SCASDP grant. In addition, the 2008 DOT OIG report found that grants targeting the introduction of new service rather than expanding existing service were more successful and noted that grants targeting existing service may be less likely to succeed because mature markets may provide less of a growth opportunity than well-selected new markets or may reflect attempts by communities to resuscitate a failing service. Lastly, the recent MIT study highlighted three communities-- Appleton, Wisconsin; Bozeman, Montana; and Manhattan, Kansas--that were able to effectively use the grants to expand service in their communities. In addition, DOT program officials we interviewed highlighted other benefits that have resulted from SCASDP grants that they said extend beyond the completion dates of the grants. For example, the officials stated that one recipient of a 2011 grant recently reported that simply obtaining the federal grant allowed the community to obtain a line of credit and prove to an airline that the grantee was able to support sustained and profitable service, even though the federal grant funds were not expended. In another example, the officials stated that one recipient of a 2002 grant reported in 2011 that while unable to establish air service prior to receiving its grant, the grant enabled the community's airport to establish and sustain air service to the area and has resulted in substantial economic benefits for the community. In addition to the federal programs previously discussed, other legislative and regulatory policies could affect the provision of air service to small communities. Perimeter rules. Airlines operating out of Reagan National, LaGuardia, and Dallas Love Field Airports are restricted in the distance that they can travel. The purposes of these rules vary but are intended, in part, to help encourage air service to smaller communities closer to the airport. However, the restrictions at Dallas Love Field will end later this year, and the number of exemptions to the perimeter rule at Reagan National has increased. Safety regulations. A new federal law that increased the qualification requirements for pilots to be hired at U.S. airlines has caused some concerns related to a potential future shortage of qualified pilots. In July 2013, FAA, as required by law, issued a new pilot qualification rule that increased the requirements for first officers who can fly for U.S. passenger and cargo airlines and requires that first officers now hold an airline transport pilot certificate, just as captains must hold, requiring, among other things, a minimum of 1,500 hours of total time as a pilot. Regional airlines--most likely to provide air service to small communities--have been disproportionally affected by the new rule because, prior to the new rule, more of their pilots did not meet the new minimum qualifications compared to their larger, mainline airline counterparts. Earlier this year, we found that 11 of the 12 regional airlines that were interviewed reported difficulties finding sufficient numbers of qualified pilots over the past year. Furthermore, five of these regional airlines reported to us that they were limiting service to some smaller communities because they did not have pilots available to provide that service. For instance, Great Lakes Airlines recently canceled service to ten small communities reportedly due to a lack of available pilots. Similarly, Silver Airways provided DOT with the required notice of its intent to discontinue scheduled service to five small communities reportedly for the same reason. However, given that the congressional mandate to increase pilot qualifications for airline pilots only recently went into effect, some market adjustments are to be expected, and such adjustments could continue to affect air service in smaller community markets. In July 2009, we concluded that a multimodal approach--one that relies on for example, bus service to larger airports or air taxi service to connect communities--is an alternative to providing scheduled air-service connectivity to small communities. For some communities that receive EAS subsidies--for example, those that have limited demand for the service due to proximity to other airports or limited population--other transportation modes might be more cost effective and practical than these subsidies. This approach may be of use to small communities that have not been able to generate sufficient demand to justify the costs for provision of air service, resulting in rising per-passenger subsidies. When potentially cost-effective alternatives, such as bus service to other airports, are not used, the costs of subsidies may be higher than necessary to link these communities to the nation's passenger aviation system. In 2009, we recommended that DOT assess whether other forms of air service or other modes of transportation might better serve some communities and at less cost. While DOT did not conduct such an assessment, the department took action to implement the options we identified in the report and achieved the intent of our recommendation. Further, the Future of Aviation Advisory Committee--a committee that provides information, advice, and recommendations to the Secretary of Transportation on U.S. aviation industry competitiveness and capability to address evolving transportation needs--recommended in 2011 that a task force be established to examine the EAS program and identify rural multimodal service opportunities for EAS-eligible communities, among other things. Although no provisions have been enacted into law to specifically promote intermodal alternatives to the EAS program, DOT (1) convened a working group in 2011 to study this area and (2) added new language to its SCASDP 2012 Request for Proposals, such language that carried forward in the 2013 request, to clarify that intermodal solutions to air service--for example, cost-effective bus service--are eligible for grants. In 2009, we also suggested that Congress consider re-examining EAS program's objectives and statutory requirements to include the possibility of assessing multimodal solutions for communities. Considering options to the current EAS program, such as multimodal transportation, may help Congress identify opportunities to limit the financial strain on the EAS program. GAO-06-21. under $100,000. However, according to DOT, this example would be considered as a type of in-kind contribution, which is discussed below. Marketing and advertising services--agreements whereby airports or communities purchase the marketing or advertising on behalf of the airline's new service designed to build awareness for a new service and develop demand so that the service can become self-sustaining. Many small airports are located in multi-airport regions in which passengers will drive long distances to nearby airports to save on price, so such advertising is of increasing importance to attract passengers to fly from their local airport. For example, according to the 2009 TRB report, Huntsville, Alabama, used a SCASDP grant to support its airport's "Huntsville Hot Ticket" program that sent e-mail fare alerts to customers when fare specials were announced, and allowed customers to book tickets directly on the airport's flyhuntsville.com website. Non-financial (in-kind) contributions--assistance referring to products, goods, or services that otherwise might have to be paid for, but which third-party providers can donate instead. For example, local advertising firms may provide billboards or local media may provide newspaper or TV coverage. Each of these incentives has certain advantages and associated risks or disadvantages, but more airports in smaller communities tend to use revenue guarantees, likely because those communities recognize that they need to share in the airlines' financial risk of serving smaller markets. However, few incentives tend to be undertaken as the only type of incentive, that is, for example, revenue guarantees are usually combined with other forms of incentives, such as cost or fee waivers. In addition, given that the service may fail, the use of federal funds to support the minimum revenue guarantees effectively requires the federal government to share this potential risk. In its 2008 review of SCASDP, the DOT OIG reported that airlines operating in small communities typically have limited resources to invest in marketing designed to stimulate demand, and using funds for marketing programs in support of other incentive programs-- such as revenue guarantees or cost subsidies--can stimulate demand by increasing awareness of airport services and mitigate "leakage" of passengers to surrounding airports. Chairman LoBiondo, Ranking Member Larsen, 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. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D., at (202) 512-2834 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony statement include Paul Aussendorf, Assistant Director; Cathy Colwell, Assistant Director; Vashun Cole; Bonnie Pignatiello Leer; Joshua Ormond; and Amy Rosewarne. The following individuals made key contributions to the prior GAO related work include: Amy Abramowitz, Dave Hooper, John Mingus, and Sara Ann Moessbauer. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Establishing and retaining reliable air service to small communities has been a challenge for decades. Communities seek access to air transportation services as a driver for attracting investment and generating employment. To incentivize service, Congress established two programs to help support air service to small communities--EAS and SCASDP. Airports are categorized by DOT's Federal Aviation Administration and described in terms of "hub" size based on the number of passengers served annually. Airports range from large hubs with at least 7.3 million passengers in 2012 to nonprimary airports with fewer than 10,000 passengers. Airports receiving subsidized EAS service are either nonhub or nonprimary, and SCASDP airports are small hub or smaller. This testimony discusses (1) the airline industry factors affecting air service to small communities, (2) the federal programs and policies that support air service to small communities, and (3) other options for improving access to air service for these communities. The testimony is based on previous GAO reports issued from 2003 through 2014; analysis of industry data for years 2007 through 2013; and selected updates on EAS and SCASDP programs. To conduct these updates, GAO reviewed program documentation and interviewed DOT officials and industry representatives. Air service to small communities has declined since 2007 due, in part, to higher fuel costs and declining population, and for some communities, compounded by more attractive service (i.e., larger airports in larger cities) within driving distance. In fact, airports of all sizes have lost capacity in the number of available seats, and largely for flights as well. However, medium-hub and small-hub airports have proportionally lost more service than large-hub or nonhub airports (see figure). The two primary programs, designed to help small communities retain air service, administered by the Department of Transportation (DOT), face challenges. The Essential Air Service (EAS) program, which received about $232 million in 2013, provided subsidies to airlines that served 117 eligible non-Alaskan communities in 2013. For the most part, only airports in eligible communities that received EAS-subsidized service have experienced an increased number of flights since 2007. However, the service may not always be the most cost-effective option for connecting people to the national transportation network, and the total and per-community EAS subsidies have grown since 2008. Legislation to control costs was recently enacted which limited access to EAS, for example by changing eligibility requirements. The Small Community Air Service Development Program (SCASDP) is a grant program to help small communities enhance air service at small-hub or smaller airports. DOT can award no more than 40 grants a year, thus SCASDP assists fewer communities than does EAS. Further, unlike EAS, funding for SCASDP--$6 million in 2013--has decreased since the program was created in 2002. Past reviews of SCASDP's effectiveness have found mixed success, with about half or less of the grants achieving their goals. Multimodal and community-based approaches can be used to help small communities connect to the nation's transportation network. Multimodal solutions, such as bus access to larger airports or air taxi service, could be more cost-effective than current programs. In addition, some communities have had success with attracting air service through methods such as financial incentives and marketing support.

CMS is responsible for overseeing Medicaid and state Medicaid agencies are responsible for administering the program. Although each state is subject to federal requirements, it develops its own Medicaid administrative structure for carrying out the program including its approach to program integrity. Within broad federal guidelines, each state establishes eligibility standards and enrolls eligible individuals; determines the type, amount, duration, and scope of covered services; sets payment rates for covered services; establishes standards for providers and managed care plans; and ensures that state and federal funds are not spent improperly or diverted by fraudulent providers. However, state Medicaid programs do not work in isolation on program integrity; instead, there are a large number of federal agencies, other state entities, and contractors with which states must coordinate. Generally, each state's Medicaid program integrity unit uses its own data models, data warehouses, and approach to analysis. States often augment their in-house capabilities by contracting with companies that specialize in Medicaid claims and utilization reviews. However, as program administrators, states have primary responsibility for conducting program integrity activities that address provider enrollment, claims review, and case referrals. Specifically, CMS expects states to collect and verify basic information on providers, including whether the providers meet state licensure requirements and are not prohibited from participating in federal health care programs maintain a mechanized claims processing and information system known as the Medicaid Management Information System (MMIS). MMIS can be used to make payments and to verify the accuracy of claims, the correct use of payment codes, and a beneficiary's Medicaid eligibility. operate a Surveillance and Utilization Review Subsystem (SURS) in conjunction with the MMIS that is intended to develop statistical profiles on services, providers, and beneficiaries in order to identify potential improper payments. For example, SURS may apply automatic post-payment screens to Medicaid claims in order to identify aberrant billing patterns. submit all processed Medicaid claims electronically to CMS's Medical Statistical Information System (MSIS). MSIS does not contain billing information, such as the referring provider's identification number or beneficiary's name, because it is a subset of the claims data submitted by states. States provide data on a quarterly basis and CMS uses the data to (1) analyze Medicaid program characteristics and utilization for services covered by state Medicaid programs, and (2) generate various public use reports on national Medicaid populations and expenditures. refer suspected overpayments or overutilization cases to other units in the Medicaid agency for corrective action and refer potential fraud cases to other appropriate entities for investigation and prosecution. Our reports and testimonies from 2001 through 2006 identified gaps in state program integrity activities and noted that the support provided by CMS to states was hampered by resource constraints. For example, in 2004, we reported that 15 of 47 states responding to our questionnaire did not affirm that they conducted data mining, defined as analysis of large data sets to identify unusual utilization patterns, which might indicate provider abuse. The DRA established the Medicaid Integrity Program to provide effective federal support and assistance to states to combat fraud, waste, and abuse. To implement the Medicaid Integrity Program, CMS created the Medicaid Integrity Group (MIG), which is now located within the agency's Center for Program Integrity. The DRA also required CMS to hire contractors to review and audit provider claims and to educate providers on issues such as appropriate billing practices. The Medicaid Recovery Audit Contractor (RAC) program was established by PPACA. Each state must contract with a RAC, which is tasked with identifying and recovering Medicaid overpayments and identifying underpayments. Each state's RAC is required to be operational by January 1, 2012. Medicaid RACs will be paid on a contingency fee basis--up to 12.5 percent--of any recovered overpayments and states are required to establish incentive payments for the detection of underpayments. Figure 1 identifies the key federal and state entities responsible for Medicaid program integrity. Fraud detection and investigations often require more specialized skills than are required for the identification of improper payments because investigators must establish that an individual or entity intended to falsify a claim to achieve some gain. As a result, fraud is more difficult to prove than improper payments and requires the involvement of entities that can investigate and prosecute fraud cases. In 1977, Congress authorized federal matching funds for the establishment of independent state Medicaid Fraud Control Units (MFCU). MFCUs are responsible for investigating and prosecuting Medicaid fraud. In general, they are located in State Attorneys Generals' offices. MFCUs can, in turn, refer some cases to federal agencies that have longstanding responsibility for combating fraud, waste, and abuse in Medicare and Medicaid--the HHS's Office of Inspector General (HHS-OIG), the Federal Bureau of Investigation (FBI), and the Department of Justice. A key challenge CMS faces in implementing the statutorily required federal Medicaid Integrity Program is ensuring effective coordination to avoid duplicating state program integrity efforts. CMS established the MIG in 2006 and it gradually hired staff and contractors to implement a set of core activities, including the (1) review and audit of Medicaid provider claims; (2) education of state program integrity officials and Medicaid providers; and (3) oversight of state program integrity activities and provision of assistance. Because states also routinely review and audit provider claims, the MIG recognized that coordination was key to avoiding duplication of effort. In 2011, the MIG reported that it was redesigning its national provider audit program to allow for greater coordination with states on data, policies, and audit measures. According to MIG data, overpayments identified by its review and audit contractors over the first 3 years of the national audit program were not commensurate with the contractors' costs. The DRA provided CMS with the resources to hire staff whose sole duties are to assist states in protecting the integrity of the Medicaid program. The MIG's core activities were implemented gradually from fiscal year 2006 to 2009. The DRA provided start up funding of $5 million for fiscal year 2006, increasing to $50 million for each of the subsequent 2 fiscal years, and $75 million per year for fiscal year 2009 and beyond. One of the first activities initiated by the MIG in fiscal year 2007 was comprehensive program integrity reviews to assess the effectiveness of states' activities, which involved eight, week-long onsite visits that year. One of the last activities to be implemented was the statutorily required National Provider Audit Program where MIG contractors review and audit Medicaid provider claims. In fiscal year 2005, we reported that CMS devoted 8.1 full time equivalent staff years to support and oversee states' anti-fraud-and-abuse operations, which, in 2010, had grown to 83 out of the 100 DRA authorized full time equivalent staff years. Table 1 describes six core MIG activities and the fiscal year in which those activities began. Figure 2 shows MIG expenditures by program category for fiscal year 2010. The Medicaid Integrity Institute accounted for about 2 percent of the MIG's fiscal year 2010 expenditures, while the National Provider Audit Program accounted for about half of expenditures. At the outset, the MIG recognized that effective coordination with internal and external stakeholders was essential to the success of the Medicaid Integrity Program. In a report issued prior to establishment of the program, we found that CMS had a disjointed organizational structure and lacked the strategic planning necessary to face the risks involved with the Medicaid program. We identified the need for CMS to develop a strategic plan in order to provide direction to the agency, its contractors, states, and its law enforcement partners. In designing and implementing the program, the MIG convened an advisory committee consisting of (1) state program integrity, Medicaid, and MFCU directors from 16 states; and (2) representatives of the FBI, HHS-OIG, and CMS regional offices. This committee provided planning input and strategic advice and identified key issues that the MIG needed to address, including The MIG's efforts should support and complement states' Medicaid integrity efforts, not be redundant of existing auditing efforts. Program integrity activities of the MIG and other federal entities require coordination with states regarding auditing and data requests. The focus of state activities should be shifted from postpayment audits to prepayment prevention activities. The advisory committee also highlighted the lack of state resources for staffing, technology, and training. CMS's July 2009 Comprehensive Medicaid Integrity Plan, the fourth such plan since 2006, stated that fostering collaboration with internal and external stakeholders of the Medicaid Integrity Program was a primary goal of the MIG. In implementing more recent statutory requirements, CMS again stressed the need for effective coordination and collaboration. CMS's commentary accompanying the final rule on the implementation of Medicaid RACs acknowledged the potential for duplication with states' ongoing efforts to identify Medicaid overpayments. States have been responsible for the recovery of all identified overpayments, including those identified since fiscal year 2009 by the MIG's audit contractors. The new requirement for states to contract with an independent Medicaid RAC introduces another auditor to identify and collect Medicaid overpayments. The Medicaid RAC program was modeled after a similar Medicare program, which was implemented in March 2009 after a 3-year demonstration. Because Medicare RACs are paid a fixed percentage of the dollar value of any improper payments identified, they generally focused on costly services such as inpatient hospital stays. Our prior work on Medicare RACs noted that the postpayment review activities of CMS's other contractors would overlap less with the RACs' audits if those activities focused on different Medicare services where improper payments were known to be high, such as home health. Because Medicaid RACs are not required to be operational until January 1, 2012, the extent to which states will structure their RAC programs to avoid duplication and complement their own provider review and audit activities remains to be seen. In its most recent annual report to the Congress, the MIG indicated that it was redesigning the National Provider Audit Program. According to the MIG, the National Provider Audit Program has not identified overpayments in the Medicaid program commensurate with the related contractor costs. About 50 percent of the MIG's $75 million annual budget supports the activities of its review and audit contractors. From fiscal years 2009 through 2011, the MIG authorized 1,663 provider audits in 44 states. However, the MIG's reported return on investment from these audits was negative. While its contractors identified $15.2 million in overpayments, the combined cost of the National Provider Audit Program was about $36 million in fiscal year 2010. The actual amount of overpayments recovered is not known because states are responsible for recovering overpayments and the MIG is not the CMS entity that tracks recoveries. Actual recoveries may be less than the identified overpayments. The National Provider Audit Program has generally relied on MSIS, which is summary data submitted by states on a quarterly basis that may not reflect voided or adjusted claims payments. As a result, the MIG's audit contractors may identify two MSIS claims as duplicates when the state has already voided or denied payment on one of these claims. For their program integrity efforts, states use their own MMIS data systems, which generally reflect real-time payments and adjustments of detailed claims for each health care service. States are required to have a SURS component that performs data mining as a part of their program integrity efforts. The MIG's review contractors use data mining techniques that may be similar to those employed by states, and they may not identify any additional improper claims. Moreover, MIG officials told us that the National Provider Audit Program did not prioritize the activities according to the dollar amount of the claim, that is, it did not concentrate its efforts on audits with the greatest potential for significant recoveries. Although the amount of overpayment identified from any given audit can vary by thousands or millions of dollars, the MIG's comprehensive reviews of several states' Medicaid integrity programs show that these states identified significantly higher levels of overpayments in 1 year than the National Provider Audit Program identified over 3 years. For example, the number of national provider audits (1,663) over three fiscal years was similar to the number that New York conducted in fiscal year 2008 (1,352), yet CMS reported that New York had identified more than $372 million in overpayments-- considerably more than the $15.2 million identified through national provider audits. The MIG's proposed redesign of the National Provider Audit Program appears to allow for greater coordination between its contractors and states on a variety of factors, including the data to be used. In fiscal year 2010, the MIG launched collaborative audits in 13 states. For these audits, the states and the MIG agreed on the audit issues to review and, in some cases, states provided the MIG's audit contractors with more timely and complete claims data. These collaborative projects (1) allowed states to augment their own audit resources, (2) addressed audit targets that states may not have been able to initiate because of a lack of staff, and (3) provided data analytic support for states that lacked that capability. Although these activities are ongoing and the results have not yet been finalized, such collaborative projects appear to be a promising approach to audits that avoids a duplication of federal and state efforts. It remains to be seen, however, whether these changes will result in an increase in identified overpayments. While the MIG's audit program is challenged to avoid duplicating states' own audit activities, its other core functions present an opportunity to enhance states' efforts. The MIG's state oversight activities are extensive and labor intensive. Although the data collected during reviews and assessments are not always consistent with each other, these oversight activities have a strong potential to inform the MIG's technical assistance and help identify training opportunities. The Medicaid Integrity Institute appears to address an important state training need. The MIG's core oversight activities--triennial comprehensive state program integrity reviews and annual assessments--are broad in scope and provide a basis for the development of appropriate technical assistance. However, we found that the information collected during reviews and the information collected from assessments was sometimes inconsistent with each other. As of November 2011, the MIG had completed the first round of reviews for 50 states and had initiated a second round of reviews in 10 states. The reviews cover the entirety of a state's program integrity activities and assess compliance with federal regulations. In advance of the MIG's week-long onsite visit, state program integrity officials are asked to respond to a 71-page protocol containing 195 questions and to provide considerable documentation. Table 2 summarizes the topics covered in the protocol. Typical compliance issues and vulnerabilities identified during the reviews include provider enrollment weaknesses, inadequate oversight of providers in Medicaid managed care, and ineffective fraud referrals to state MFCUs. Much of the information collected during the assessments--Medicaid program integrity characteristics, program integrity planning, prevention, detection, investigation and recoveries--is also collected during the triennial comprehensive reviews. In addition, we found inconsistencies between the information reported in the comprehensive reviews and in the assessments for several states that were conducted at about the same time. For example, there was a significant discrepancy for one state in the number of staff it reported as being dedicated to program integrity activities. According to the MIG, knowing the size of state program integrity staff helps it to more appropriately tailor content during training events. Improved consistency will help the MIG ensure that it is targeting its training and technical assistance resources appropriately. Despite the frequency of the annual assessments, the most current data cover fiscal year 2008, which the MIG began collecting in fiscal year 2010. Although the MIG provides states with a glossary explaining each of the requested data elements, it is not clear that the information submitted is reliable or comparable across states. Our review of a sample of assessments revealed missing data and a few implausible measures, such as one state reporting over 38 million managed care enrollees. In other states, there were dramatic changes in the data reported from 2007 to 2008, which either raises a question about the reliability of the data or suggests that states be allowed to explain significant changes from year to year. For example, the number of audits in one state declined from 203 to 35. According to MIG officials, the comprehensive reviews and the assessments inform the MIG's technical assistance activities with the states. For example, we found that the MIG published best practices guidance in 2008 after finding weaknesses in coordination between state program integrity officials and their respective MFCU's in a number of states. In its report to Congress on fiscal year 2010 activities, the MIG indicated it completed 420 requests for technical assistance from 43 states, providers, and others. The most common topics included the National Provider Audit Program, policy and regulatory requirements on disclosures, provider exclusions and enrollment, and requests for statistical assistance related to criminal and civil court actions. Examples of assistance provided to the states by the MIG included (1) hosting regional state program integrity director conference calls to discuss program integrity issues and best practices; and (2) helping develop a State Medicaid Director Letter (issued in July 2010) on the return of federal share of overpayments under PPACA. The federally sponsored Medicaid Integrity Institute not only offers state officials free training but also provides opportunities to develop relationships with program integrity staff from other states. The institute addresses our prior finding that CMS did not sponsor any fraud and abuse workshops or training from 2000 through 2005. From fiscal years 2008 through 2012, the institute will have trained over 2,265 state employees at no cost to states. Given the financial challenges states currently face, it is likely that expenditures for training and travel are limited. Expenditures on the institute accounted for about $1.3 million of the MIG's $75 million annual budget. MIG officials told us that states uniformly praised the opportunity to network and learn about best practices from other states. A special June 2011 session at the institute brought together Medicaid program integrity officials and representatives of MFCUs from 39 states in an effort to improve the working relations between these important program integrity partners. In addition to the institute, the MIG has a contractor that provides (1) education to broad groups of providers and beneficiaries, and (2) targeted education to specific providers on certain topics. For example, the education contractor has provided outreach through its attendance at 17 conferences with about 36,000 attendees. These conferences were sponsored by organizations devoted to combating health care fraud such as the National Association of Medicaid Program Integrity and National Health Care Anti-Fraud Association, as well as meetings of national and regional provider organizations (hospital, home care and hospice and pharmacy). An example of a more targeted activity is one focused on pharmacy providers. The MIG's education contractor is tasked with developing provider education materials to promote best prescribing practices for certain therapeutic drug classes and remind providers of the appropriate prescribing guidelines based on FDA approved labeling. The education program includes some face-to-face conversations, mailings to providers, and distribution of materials on a website and at conferences and meetings. These activities are collaborative efforts with the states so that states are: aware of the aberrant providers, participate in the education program, and can implement policy changes to address these issues, as appropriate. We discussed the facts in this statement with CMS officials. Chairmen Pratts and Gowdy, this concludes my prepared remarks. I would be happy to answer any questions that you or other Members may have. For further information about this statement, please contact Carolyn L. Yocom at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relation and Public Affairs may be found on the last page of this statement. Walter Ochinko, Assistant Director; Sean DeBlieck; Iola D'Souza; Leslie V. Gordon; Drew Long; Jessica Smith; and Jennifer Whitworth were key contributors to this statement. Fraud Detection Systems: Additional Actions Needed to Support Program Integrity Efforts at Centers for Medicare and Medicaid Services. GAO-11-822T. Washington, D.C.: July 12, 2011. Fraud Detection Systems: Centers for Medicare and Medicaid Services Needs to Ensure More Widespread Use. GAO-11-475. Washington, D.C.: June 30, 2011. Improper Payments: Recent Efforts to Address Improper Payments and Remaining Challenges. GAO-11-575T. Washington, D.C.: April 15, 2011. Status of Fiscal Year 2010 Federal Improper Payments Reporting. GAO-11-443R. Washington, D.C.: March 25, 2011. Medicare and Medicaid Fraud, Waste, and Abuse: Effective Implementation of Recent Laws and Agency Actions Could Help Reduce Improper Payments. GAO-11-409T. Washington, D.C.: March 9, 2011. Medicare: Program Remains at High Risk Because of Continuing Management Challenges. GAO-11-430T. Washington, D.C.: March 2, 2011. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Medicare Recovery Audit Contracting: Weaknesses Remain in Addressing Vulnerabilities to Improper Payments, Although Improvements Made to Contractor Oversight. GAO-10-143. Washington, D.C.: March 31, 2010. Medicaid: Fraud and Abuse Related to Controlled Substances Identified in Selected States. GAO-09-1004T. Washington, D.C.: September 30, 2009. Medicaid: Fraud and Abuse Related to Controlled Substances Identified in Selected States. GAO-09-957. Washington, D.C.: September 9, 2009. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. Medicaid: Thousands of Medicaid Providers Abuse the Federal Tax System. GAO-08-239T. Washington, D.C.: November 14, 2007. Medicaid: Thousands of Medicaid Providers Abuse the Federal Tax System. GAO-08-17. Washington, D.C.: November 14, 2007. Medicaid Financial Management: Steps Taken to Improve Federal Oversight but Other Actions Needed to Sustain Efforts. GAO-06-705. Washington, D.C.: June 22, 2006. Medicaid Integrity: Implementation of New Program Provides Opportunities for Federal Leadership to Combat Fraud, Waste, and Abuse. GAO-06-578T. Washington, D.C.: March 28, 2006. Medicaid Fraud and Abuse: CMS's Commitment to Helping States Safeguard Program Dollars Is Limited. GAO-05-855T. Washington, D.C.: June 28, 2005. Medicaid Program Integrity: State and Federal Efforts to Prevent and Detect Improper Payments. GAO-04-707. Washington, D.C.: July 16, 2004. Medicaid: State Efforts to Control Improper Payments. GAO-01-662. Washington, D.C.: June 7, 2001. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Centers for Medicare & Medicaid Services (CMS), the federal agency that oversees Medicaid, estimated that improper payments in the federal-state Medicaid program were $21.9 billion in fiscal year 2011. The Deficit Reduction Act of 2005 established the Medicaid Integrity Program and gave CMS an expanded role in assisting and improving the effectiveness of state activities to ensure proper payments. Making effective use of this expanded role, however, requires that federal resources are targeted appropriately and do not duplicate state activities. GAO was asked to testify on Medicaid program integrity. GAO's statement focuses on how CMS's expanded role in ensuring Medicaid program integrity (1) poses a challenge because of overlapping state and federal activities regarding provider audits and (2) presents opportunities through oversight to enhance state program integrity efforts. To do this work, GAO reviewed CMS reports and documents on Medicaid program integrity as well as its own and others' reports on this topic. In particular, GAO reviewed CMS reports that documented the results of its state oversight and monitoring activities. GAO also interviewed CMS officials in the agency's Medicaid Integrity Group (MIG), which was established to implement the Medicaid Integrity Program. This work was conducted in November and December 2011. GAO discussed the facts in this statement with CMS officials. The key challenge faced by the Medicaid Integrity Group (MIG) is the need to avoid duplication of federal and state program integrity efforts, particularly in the area of auditing provider claims. In 2011, the MIG reported that it was redesigning its national provider audit program. Previously, its audit contractors were using incomplete claims data to identify overpayments. According to MIG data, overpayments identified by its audit contractors since fiscal year 2009 were not commensurate with its contractors' costs. The MIG's redesign will result in greater coordination with states on a variety of factors, including the data to be used. It remains to be seen, however, whether these changes will result in an increase in identified overpayments. The table below highlights the MIG's core oversight activities, which were implemented from fiscal years 2007 through 2009. The MIG's core oversight activities present an opportunity to enhance state efforts through the provision of technical assistance and the identification of training opportunities. The MIG's assessment of state program integrity efforts during triennial onsite reviews and annual assessments will need to address data inconsistencies identified during these two activities. Improved consistency will help ensure that the MIG is appropriately targeting its resources. The Medicaid Integrity Institute appears to address a state training need and create networking opportunities for program integrity staff.

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss the results of our review of the Credit Research Center (the Center) report on personal bankruptcy debtors' ability to pay their debts and share with you our observations on the February 1998 Ernst & Young report that also examines debtors' ability to pay. Both reports represent a useful first step in addressing a major public policy issue--whether some proportion of those debtors who file for personal bankruptcy under chapter 7 of the bankruptcy code have sufficient income, after expenses, to pay a "substantial" portion of their outstanding debts. Specifically, you requested that we evaluate each report's research methodology and formula for estimating the income that debtors have available to pay debts. On February 9, 1998, we reported the results of our more extensive review of the Center report and selected data to you and the Ranking Minority Member of this Subcommittee. Debtors who file for personal bankruptcy usually file under chapter 7 or chapter 13 of the bankruptcy code. Generally, debtors who file under chapter 7 of the bankruptcy code seek a discharge of all their eligible dischargeable debts. Debtors who file under chapter 13 submit a repayment plan, which must be confirmed by the bankruptcy court, for paying all or a portion of their debts over a 3-year period unless for cause the court approves a period not to exceed 5 years. report concluded, however, that no one explanation is likely to capture the variety of reasons that families fail and file for bankruptcy. Nor is there agreement on (1) the number of debtors who seek relief through the bankruptcy process who have the ability to pay at least some of their debts and (2) the amount of debt such debtors could repay. One reason for the lack of agreement is that there is little reliable data on which to assess such important questions as the extent to which debtors have an ability to pay their eligible dischargeable debts; the amount and types of debts that debtors have voluntarily repaid under chapters 7 and 13; the characteristics of chapter 13 repayment plans that were and were not successfully completed; and the reasons for the variations among bankruptcy districts in such measures as the percentage of chapter 13 repayment plans that were successfully completed. Several bills have been introduced in Congress that would implement some form of "needs-based" bankruptcy. These include S.1301, H.R. 2500, and H.R. 3150. All of these bills include provisions for determining when a debtor could be required to file under chapter 13, rather than chapter 7. Currently, the debtor generally determines whether to file under chapter 7 or chapter 13. Each bill would generally establish a "needs-based" test, whose specific provisions vary among the bills, that would require a debtor to file under chapter 13 if the debtor's net income after allowable expenses would be sufficient to pay about 20 percent of the debtor's unsecured nonpriority debt over a 5-year period. If the debtor were determined to be unable to pay at least 20 percent of his or her unsecured nonpriority debt over 5 years, the debtor could file under chapter 7 and have his or her eligible debts discharged. Another bill, H.R. 3146, focuses largely on changes to the existing "substantial abuse" provisions under section 707(b) of the bankruptcy code as the means of identifying debtors who should be required to file under chapter 13 rather than chapter 7. The Center report and Ernst & Young reports attempted to estimate (1) how many debtors who filed for chapter 7 may have had sufficient income, after expenses, to repay at "a substantial portion" of their debts and (2) what proportion of their debts could potentially be repaid. The Center report was based on data from 3,798 personal bankruptcy petitions filed principally in May and June 1996 in 13 of the more than 180 bankruptcy court locations. The petitions included 2,441 chapter 7 and 1,357 chapter 13 petitions. On the basis of the Center report's assumptions and the formula used to determine income available for repayment of nonpriority, nonhousing debt, the report estimated that 5 percent of the chapter 7 debtors in the 13 locations combined could, after expenses, repay all of their nonpriority, nonhousing debt over 5 years; 10 percent could repay at least 78 percent; and 25 percent could repay at least 30 percent. The Center report also estimated that about 11 percent of chapter 13 debtors and about 56 percent of chapter 7 debtors were expected to have no income available to repay nonhousing debts. Ernst & Young's report was based on a sample of 5,722 chapter 7 petitions in four cities--Los Angeles, Chicago, Boston, and Nashville--that were filed mainly in 1992 and 1993. Ernst & Young concluded that, under the needs-based provisions of H.R. 3150, from 8 to 14 percent (average 12 percent) of the chapter 7 filers in these four cities would have been required to file under chapter 13 rather than chapter 7, and could have repaid 63 to 85 percent (average 74 percent) of their unsecured nonpriority debts over a 5 year repayment period. The report concluded that its findings corroborated the Center report's findings that "a sizeable minority of chapter 7 debtors could make a significant contribution toward repayment of their non-housing debt over a 5-year period." discussed our observations about the report with the Ernst & Young study author. It is important to note that the findings of both the Center report and Ernst & Young report rest on fundamental assumptions that have not been validated. Both studies share two fundamental assumptions: (1) that the information found on debtors' initial schedules of estimated income, estimated expenses, and debts was accurate; and (2) that this information could be used to satisfactorily forecast debtors' income and expenses for a 5-year period. These assumptions have been the subject of considerable debate, and the researchers did not test their validity. With regard to the first assumption, the accuracy of the data in bankruptcy petitioners' initial schedules of estimated income, estimated expenses, and debts is unknown. Both reports assumed that the data in these schedules are accurate. However, both reports also stated that to the extent the data in the schedules were not accurate, the data would probably understate the income debtors have available for debt repayment. This reflected the researchers' shared belief that debtors have an incentive in the bankruptcy process to understate income, overstate expenses, and thereby understate their net income available for debt repayment. However, there have been no studies to validate this belief. It is plausible that, to the extent there are errors in the schedules, debtors could report information that would have the effect of either overstating or understating their capacity to repay their debts, with a net unknown bias in the aggregate data reported by all debtors. One cause of such errors could be that the schedules are not easily interpreted by debtors who proceed without legal assistance. In Los Angeles, a location whose data contributed significantly to the findings of both reports, Center data showed that about one-third of debtors reported they had not used a lawyer. repayment. Neither report allowed for situations in which the debtor's income decreases or expenses increase during the 5-year period. Past experience suggest that not all future chapter 13 debtors will successfully complete their repayment plans. To the extent this occurs, it would reduce the amount of debt that future debtors repay under required chapter 13 repayment plans. A 1994 report by the Administrative Office of the U.S. Courts found that only about 36 percent of the 953,180 chapter 13 cases terminated during a 10-year period ending September 30, 1993, had been successfully completed. The remaining 64 percent were either dismissed or converted to chapter 7 liquidation, in which all eligible debts were discharged. The reasons for this low completion rate are unknown, but this illustrates the high level of discrepancy between the amount that debtors could potentially repay, based on the data and assumptions used in the two reports, and what has occurred over a 10-year period. Another assumption made in both reports is that 100 percent of debtors' income available for debt repayment will be used to repay debt for a 5-year period. This assumption does not reflect actual bankruptcy practice. Chapter 13 repayment plans require greater administrative oversight, and thus cost more than chapter 7 cases, including periodic review of the debtors progress in implementing the plan and review of debtors' or creditors' requests to alter the plan. In fiscal year 1996, for example, creditors received about 86 percent of chapter 13 debtor payments. The remaining 14 percent of chapter 13 debtor payments were used to pay administrative costs, such as statutory trustee fees and debtor attorneys' fees. Neither study addressed the additional costs for judges and administrative support requirements that would be borne by the government should more debtors file under chapter 13. nation as a whole or of each location for the year from which the samples were drawn. Therefore, the data on which the reports were based may not reflect all bankruptcy filings nationally or in each of the 15 locations for the years from which the petitions were drawn. One difference between the two reports involves the calculation of debtor expenses. The Center's estimates of debtor repayment capacity are based on the data reported in debtors' initial schedules of estimated income, estimated expenses, and debts. The Center report calculated debtor expenses using the data reported on debtors' estimated income and estimated expense schedules. The Ernst & Young report, whose purpose was to estimate the effect of implementing the provisions of H.R. 3150, adjusted debtors' expenses using the provisions of H.R. 3150. Following these provisions, Ernst & Young used the expenses debtors reported on their schedules of estimated expenses for alimony payments, mortgage debt payments, charitable expenses, child care, and medical expenses. For all other expenses, including transportation and rent, Ernst & Young used Internal Revenue Service (IRS) standard expense allowances, based on both family size and geographic location. The impact of these adjustments on debtors' reported expenses was not discussed in the report. However, to the extent these adjustments lowered debtors expenses, they would have increased the report's estimates of debtors' repayment capacity when compared to the methodology used in the Center report. To the extent the adjustments increased debtors' reported expenses, they would have decreased the report's estimates of debtor repayment capacity. Also, to the extent that these adjustments reduced debtors' reported expenses, the adjustments would have corrected, at least in part, for what the report assumed was debtors' probable overstatement of expenses on their schedules of estimated expenses. pay. Conversely, to the extent that actual family size was smaller than these averages, the report overstated allowable expenses, and thus understated the debtors' ability to pay. A third difference between the reports involves assumptions about repayment of secured, nonhousing debt. The Center report assumed that debtors would continue payments on their mortgage debt and pay their unsecured priority debt. Unlike the Center report, the Ernst & Young report appears to have assumed that debtors will repay, over a 5-year period, all of their secured nonhousing debt and all of their unsecured priority debt. The purpose of this assumption was to estimate the amount of unsecured nonpriority debt that debtors' could potentially repay after paying their secured nonhousing debt and unsecured priority debt. On March 10, 1998 we received an Ernst & Young report that used a national sample of chapter 7 petitions from calendar year 1997 to estimate debtors' ability to pay. Although we have not had an opportunity to examine this report in detail, the report appears to have addressed many of the sampling issues we raised regarding the Center report and February 1998 Ernst & Young report. However, the March 1998 Ernst & Young report shares the fundamental unvalidated assumptions of the Credit Center report and the February 1998 Ernst & Young report. These assumptions include (1) the data reported on debtors' schedules of estimated income, estimated expenses, and debts are accurate; (2) the data in these schedules can be used to satisfactorily forecast debtors' income and expenses for a 5-year period; (3) that 100 percent of debtors' net income after expenses, as determined in the report, will be used for debt repayment over a 5-year repayment period; and (4) that all debtors will satisfactorily complete their 5-year repayment plans. be more or less than the estimates in these two studies. Similarly, the amount of debt these debtors could potentially repay could also be more or less than the reports estimated. Finally, although the March 1998 Ernst & Young report is based on what is apparently a national representative sample of chapter 7 petitions, to the extent that the report is based on the same basic data (petitioners financial schedules) and assumptions as the Center report and the February 1998 Ernst & Young report, it shares the same limitations as these two earlier reports. This concludes my prepared statement, Mr. Chairman. I would be pleased to answer 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. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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GAO discussed the results of its review of the Credit Research Center report on personal bankruptcy debtors' ability to pay their debts and observations on the February 1998 Ernst & Young report that also examines debtors' ability to pay. GAO noted that: (1) both studies share two fundamental assumptions that: (a) the information found in debtors' initial schedules of estimated income, estimated expenses, and debts is accurate; and (b) this information could be used to satisfactorily forecast debtors' income and expenses for a 5-year period; (2) these assumptions have been the subject of considerable debate, and the researchers did not test their validity; (3) with regard to the first assumption, the accuracy of the data in bankruptcy petitioners' initial schedules of estimated income, estimated expenses, and debt is unknown; (4) however, both reports also stated that to the extent the data in the schedules were not accurate, the data would probably understate the income debtors have available for debt repayment; (5) with regard to the second assumption, there is also no empirical basis for assuming that debtors' income and expenses, as stated in their initial schedules, would remain stable for a 5-year period following the filing of their bankruptcy petitions; (6) these two assumptions--debtors' income and expenses remain stable and all repayment plans would be successfully completed--could result in a somewhat optimistic estimate of debt repayment; (7) neither report allowed for situations in which the debtor's income decreases or expenses increase during the 5-year period; (8) one difference between the two reports involve the calculation of debtor expenses; (9) a second difference between the two reports involves the calculation of mortgage debt and family size; (10) a third difference between the reports involves assumptions about repayment of secured, nonhousing debt; (11) on March 10, 1998, GAO received an Ernst & Young report that used a national sample of Chapter 7 petitions from calendar year 1997 to estimate debtors' ability to pay; (12) the report appears to have addressed many of the sampling issues GAO raised regarding the Center report and February 1998 Ernst & Young report; and (13) however, the March 1998 Ernst & Young report shares the fundamental unvalidated assumptions of the Credit Center report and the February 1998 Ernst & Young report.

The JSF program is DOD's largest cooperative program. It is structured on a multitiered set of relationships involving both government and industry from the United States and eight allied nations--the United Kingdom, Italy, the Netherlands, Turkey, Denmark, Norway, Canada, and Australia. These relationships are shown in figure 1. The JSF program structure was established through a framework memorandum of understanding (MOU) and individual supplemental MOUs between each of the partner country's defense department or ministry and DOD, negotiating on behalf of the U.S. government. These agreements identify the roles, responsibilities, and expected benefits for all participants. The current negotiated agreement covers only the system development and demonstration phase, and participation now does not guarantee participation in future phases. The program intends to produce three fighter variants to meet multiservice requirements: conventional flight for the Air Force, short take-off and vertical landing for the Marine Corps, and carrier operations for the Navy. As currently planned, the program will cost about $200 billion to develop and procure about 2,600 aircraft and related support equipment. In October 2001, DOD awarded Lockheed Martin Aeronautics Company a contract for the system development and demonstration phase. Pratt and Whitney and General Electric were awarded contracts to develop the aircraft engines. This phase is estimated to last about 10 years and cost about $33 billion; it will involve large, fixed investments in human capital, facilities, and materials. The next significant knowledge point will be a critical design review, currently planned for July 2005. At that time, the aircraft design should be stable and engineering drawings should be available to confirm that the design performs acceptably and can be considered mature. The United States and its partners expect to realize a variety of benefits from cooperation on the JSF program. The United States expects to benefit from partner contributions and potential future aircraft sales; access to partner industrial capabilities; and improved interoperability with partner militaries once the aircraft is fielded. Partner governments expect to benefit financially and obtain an aircraft they could not afford to develop on their own. Partners also expect to benefit from increased access to JSF program data, defined influence over aircraft requirements, and technology transfers to their industries from U.S. aerospace companies. For the partners, industrial return, realized through JSF subcontract awards, is critical for their continued participation in the program. According to DOD and the program office, through its cooperative agreements, the JSF program contributes to armaments cooperation policy in the following four areas: Political/military-expanded foreign relations. Economic-decreased JSF program costs from partner contributions. Technical-increased access to the best technologies of foreign partners. Operational-improved mission capabilities through interoperability with allied systems. DOD and the JSF Program Office expect to benefit financially from direct partner contributions and through aircraft purchased by partners and other international buyers, which reduces overall unit cost. Foreign countries become program partners at one of three participation levels, based on financial contribution, which the United States uses to defray program costs. For the current system development and demonstration phase, partner governments have committed to provide over $4.5 billion to the JSF program and are expected to purchase 722 aircraft once the aircraft enters the production phase. According to DOD, foreign military sales to nonpartner countries could include an additional 1,500 to 3,000 aircraft. Expected partner financial contributions and aircraft purchases are detailed in table 1. Contributions can be financial or nonfinancial. For example, Turkey's system development and demonstration contribution was all cash. Denmark contributed $110 million in cash, and also the use of an F-16 aircraft and related support equipment for future JSF flight tests and the use of North Atlantic Treaty Organization command and control assets for a JSF interoperability study, which were valued to be worth an additional $15 million to the program. In addition, U.S. industry cooperation with aerospace suppliers in partner countries is expected to benefit the JSF program because of the specific advanced design and manufacturing capabilities available from those suppliers. For example, British industry has a significant presence in the program with BAE Systems as a teammate to Lockheed Martin and Rolls Royce as a major engine subcontractor. In addition, Fokker Aerostructures in the Netherlands is under contract to develop composite flight doors for the JSF airframe. Partner governments expect to benefit financially by leveraging significant U.S. resources and inventory requirements to obtain an advanced tactical aircraft they could not afford to develop on their own. From a government perspective, Level I and II partners have been guaranteed waivers of nonrecurring aircraft costs; Level III partners will be considered for a similar waiver. All partners are also eligible to receive potential levies collected on future foreign military sales of aircraft to nonpartner customers. In addition, and in most cases more importantly, partners have identified industrial return to in-country suppliers as vital to their participation in the program. In a recent study assessing the financial impact of the JSF program on international suppliers, DOD reported that partners could potentially earn between $5 and $40 of revenue in return for each dollar contributed to the program. Through government and industrial participation, partner countries also expect to benefit from the technology transferred from U.S. to partner industry through JSF contract awards. Partners expect that early participation in the JSF program will improve their defense industrial capability through increased access to design, technical, and manufacturing data and through the ability to perform advanced planning for operation and support of the JSF once it is delivered in their respective countries. Involvement in the early phases of the JSF program has provided partners with information on the development of aircraft requirements, program costs and schedules, and logistics concepts. International partners have access to program and technology information through participation on senior-level management decision-making bodies, representation in the JSF Program Office, and involvement on program integrated product teams. Partner program office personnel, regardless of participation level, have equal access to most information. Partner staff can request information from integrated product teams on which they have no membership, as long as the information is not restricted from being released to their countries. International program participants have significant expectations regarding government and industry return based on their contributions. As such, the JSF Program Office and Lockheed Martin are faced with balancing these expectations against other program goals. Recent actions by Lockheed Martin to address partner concerns could represent a departure from the JSF competitive contracting approach and result in increased program costs. International participation in the program also presents a challenge because the transfer of technologies necessary to achieve DOD's goals for aircraft commonality is expected to far exceed past transfers of advanced military technology. Further, export authorizations for critical suppliers need timely planning, preparation, and disposition to help avoid schedule delays in the program and ensure partners the opportunity to bid for contracts. DOD and the JSF Program Office have said that the use of competitive contracting is central to meeting partner expectations for industrial return and will assist in controlling program costs. JSF officials use the term "best value" to describe this approach, which is a departure from other cooperative development programs that guarantee pre-determined levels of works based on contribution. Partner representatives generally agree with the JSF competitive approach to contracting, but some emphasize that their industries' ability to win JSF contracts whose total value approaches or exceeds their financial contributions for the JSF system development and demonstration phase is important for their continued involvement in the program. The program office and the prime contractor have a great deal of responsibility for providing a level playing field for JSF competitions, including visibility into the subcontracting process and opportunities for partner industries to bid on subcontracts. To that end, Lockheed Martin performed assessments for many of the partners to determine the ability of their industries to compete for JSF contracts. The results of these assessments in some cases showed potential return that far exceeded country contribution levels. In some cases, Lockheed Martin then signed agreements with partner governments and suppliers to document the opportunities they would have to bid for JSF contracts, as well as the potential value of those contracts. DOD and the JSF Program Office have left implementation of the competitive contracting approach to Lockheed Martin whose decisions will therefore largely determine how partner expectations are balanced against program goals. In at least one case, Lockheed Martin has promised an international contractor predetermined work that satisfies a major portion of that country's expected return-on-investment. While disavowing knowledge of the specific contents of any such agreement, DOD was supportive of their use during partner negotiations. DOD officials conceded that the agreements contained in these documents departed from the competitive approach. However, the agreements were necessary to secure political support in some countries, since the U.S. government does not guarantee that the partners will recoup their investment through industry contracts on the JSF program. In addition, Lockheed Martin has recently developed a plan to use "strategic best value sourcing" to supplement its original competitive approach. According to DOD, this plan will allow for a limited number of work packages to be directly awarded to industry in partner countries where contract awards to date have not met expectations. While there are predetermined cost goals under these strategic awards, there are concerns from some partners that this is a departure from the competitive approach and, in fact, a move toward prescribed work share. Because Lockheed Martin makes the subcontracting decisions, it bears the primary responsibility for managing partner expectations--in addition to duties associated with designing, developing, and producing the aircraft. Lockheed Martin's actions seem to indicate a response to partner concerns about return-on-investment expectations and a desire to ensure continued partner participation. Most partners have a clause in their agreements that allow for withdrawal from this phase of the program if industrial participation is not satisfactory. If a partner decided to leave the program, DOD would be deprived of the additional development funding expected from that partner. Lockheed Martin could be faced with lower than projected international sales, resulting in fewer units sold. At the same time, directed work share often results in less than optimal program results. For example, other coproduction programs such as the F-16 Multinational Fighter, which employ the traditional work share approach, often pay cost premiums in terms of increased manufacturing costs associated with use of foreign suppliers. The United States has committed to design, develop, and qualify aircraft for partners that fulfill the JSF operational requirements document and are as common to the U.S. JSF configuration as possible within National Disclosure Policy. DOD and the JSF Program Office must balance partner expectations for commonality against the transfer of U.S. military technology. Decisions in this area will be critical because the extent of technology transfers necessary to achieve program goals will push the boundaries of U.S. disclosure policy for some of the most sensitive U.S. military technology. To address these issues, Lockheed Martin has a contract requirement to conduct a study to develop a partner JSF specification that fulfills commonality goals. Due to issues related to the disclosure review process, the contractor expects to deliver the study to the program office in August 2003, 5 months later than originally planned. According to DOD, the program has requested exceptions from National Disclosure Policy in some cases to achieve aircraft commonality goals and avoid additional development costs. Some DOD officials told us that technology transfer decisions have been influenced by JSF program goals, rather than adjusting program goals to meet current disclosure policy. DOD, JSF Program Office, and Lockheed Martin officials agreed that technology transfer issues should be resolved as early as possible in order to meet program schedules without placing undue pressure on the release process. The program has taken steps to address potential concerns, including chartering a working group to review how past export decisions apply to the JSF program; identify contentious items in advance; and provide workable resolutions that minimize the impact to the program cost, schedule, or performance. However, partners have expressed concern about the pace of information sharing and decision making related to the JSF support concept. For example, according to several partners, greater access to technical data is needed so that they can plan for and develop a sovereign support infrastructure as expressed in formal exchanges of letters with the United States. The JSF program is conducting trade studies to further define the concept for how the JSF will be maintained and supported worldwide so that it can start to address these issues. According to program officials, this strategy will identify the best approach for maintaining JSF aircraft, and it may include logistics centers in partner countries. Follow-on trade studies would determine the cost of developing additional maintenance locations. The implementation of the global support solution and the options identified in follow-on trade studies will have to be in full compliance with the National Disclosure Policy, or the program will need to request exceptions. Authorization for export of JSF information to partners and international suppliers also present challenges for the program. In addition to the U.S. government determining the level of disclosure for partners and technology areas, JSF contractors must receive authorization to transfer data and technology through the export control process. Due to the degree of international participation at both a government and an industry level, a large number of export authorizations are necessary to share project information with governments, solicit bids from partner suppliers, and execute contracts. The JSF Program Office and Lockheed Martin told us that there were over 400 export authorizations and amendments granted during the JSF concept demonstration phase, and they expect that the number of export authorizations required for the current phase could exceed 1,000. Lockheed Martin officials told us that an increased level of resources has been required to address licensing and other export concerns for the program. Export authorizations for critical suppliers need to have timely planning, preparation, and disposition to help avoid schedule delays and cost increases in the program. Without proper planning, there could be pressure to expedite reviews and approvals of export authorizations to support program goals and schedules. In addition, advanced identification of potential alternative sources for critical contracts could be an appropriate action to prevent schedule delays in the event of unfavorable approval decisions. Although it is required to do so, Lockheed Martin has not completed a long-term industrial participation plan that provides information on JSF subcontracting. Such a plan could be used to anticipate export authorizations needed for international suppliers and identify potential licensing concerns far enough in advance to avoid program disruption or accelerated licensing reviews. Our work has shown that past cooperative programs have experienced cost and schedule problems as a result of poor planning for licenses. For example, like the JSF, the Army's Medium Extended Air Defense System program involves several sensitive technologies critical to preserving the U.S. military advantage. That program failed to adequately plan for release requirements related to those technologies and saw dramatic increases in approval times, which affected contractors' ability to use existing missile technology and pursue the cheapest technical solution. Timely disposition of export authorizations is also necessary to avoid excluding partner industries from competitions. While Lockheed Martin has stated that no foreign supplier has been excluded from any of its competitions or denied a contract because of fear of export authorization processing times or the conditions that might be placed on an authorization, the company is concerned this could happen. In fact, one partner told us that export license delays have had a negative effect on the participation of its companies because some U.S. subcontractors have been reluctant to take on the added burden of the license process. The U.S. subcontractors must apply for the export authorization on behalf of the foreign supplier, which can add time and expense to their contracts. Further, we were told that some partner companies have been unable to bid due to the time constraints involved in securing an export license. The JSF program has attempted to address the additional administrative tasks associated with export authorizations by adding resources to help prepare applications and exploring ways to streamline the process. For example, Lockheed Martin received a global project authorization (GPA)--an "umbrella" export authorization that allows Lockheed Martin and other U.S. suppliers on the program to enter into agreements with over 200 partner suppliers to transfer certain technical data--from the Department of State. Approved in October 2002, implementation of the GPA was delayed until March 2003 because of supplier concerns related to liability and compliance requirements. In March 2003, the first GPA implementing agreement between Lockheed Martin and a company in a partner country was submitted and approved in 4 business days. JSF partners have expressed dissatisfaction with the time it has taken to finalize the conditions under which the GPA can be used and disappointment that the authorization may not realize their expectations in terms of reducing the licensing burdens of the program. As currently structured, the GPA does not cover the transfer of any classified information or certain unclassified, export-controlled information in sensitive technology areas such as stealth, radar, and propulsion. The Joint Strike Fighter program, and its implications for acquisition reform and cooperative development, is a good test of whether the desire for better outcomes can outweigh traditional management pressures. In our 2001 review of JSF technical maturity, we employed knowledge standards consistent with best practices and DOD acquisition reforms and found that several technologies critical to meeting requirements were not sufficiently mature. The best practice for such a decision is to have a match between technologies and weapon requirements. At its recent preliminary design review, the JSF program uncovered significant problems with regard to various issues, including aircraft weight, design maturity, and weapons integration. Such problems have historically resulted in increased program costs, longer development schedules, or a reduction in system capabilities. While such actions can negatively affect the U.S. military services, the impact may be more substantial for partners because they have less control over program decisions and less ability to adjust to these changes. This may affect partners' participation in the program in a variety of ways. First, the continued affordability of the development program and the final purchase price are important for partners--both of which could be affected by recent technical problems. There is no guarantee that partners will automatically contribute to cost overruns, especially if the increase is attributable to factors outside their control. Therefore, future cost increases in the JSF program may fall almost entirely on the United States because there are no provisions in the negotiated agreements requiring partners to share these increases. Partner representatives indicated that they intend to cooperate with the JSF Program Office and Lockheed Martin in terms of sharing increased program costs when justified. However, some partner officials expressed concern over the tendency of U.S. weapon system requirements to increase over time, which results in greater risk and higher costs. While some partners could fund portions of cost overruns from military budgets if requested, others told us that even if they were willing to support such increases, these decisions would have to be made through their parliamentary process. DOD has not required any of the partners to share cost program increases to date. For example, cost estimates for the system development and demonstration phase have increased on multiple occasions since the program started in 1996. During that time, the expected cost for this phase went from $21.2 billion to $33.1 billion as a result of scope changes and increased knowledge about cost. According to DOD, partners have not been required to share any of these costs because the changes were DOD directed and unrelated to partner actions or requirements. To encourage partners to share costs where appropriate, the United States has said it will consider past cost sharing behavior when negotiating MOUs for future phases of the program. If a partner refuses to share legitimate costs during the system development and demonstration phase, the United States can use future phase negotiations to recoup all or part of those costs. In these instances, the United States could reduce levies from future sales, refuse to waive portions of the nonrecurring cost charges for Level III partners, or in a worst case, choose not to allow further participation in the program. However, DOD officials have not committed to using these mechanisms to encourage cost sharing. Therefore, DOD may be forced to choose between accepting the additional cost burden and asking for additional partner contributions--which could jeopardize partner support for the program. The JSF program is not immune to unpredictable cost growth, schedule delays, and other management challenges that have historically plagued DOD's systems acquisition programs. International participation in the program, while providing benefits, makes managing these challenges more difficult and places additional risk on DOD and the prime contractor. While DOD expects international cooperation in systems acquisition to benefit future military coalition engagements, this may come at the expense of U.S. technological and industrial advantages or the overall affordability of the JSF aircraft. Over the next 2 years, DOD will make decisions that critically affect the cost, schedule, and performance of the program. Because Lockheed Martin bears the responsibility for managing partner industrial expectations, it will be forced to balance its ability to meet program milestones and collect program award fees against meeting these expectations--which could be key to securing future sales of the JSF for the company. In turn, DOD must be prepared to assess and mitigate any risks resulting from these contractor decisions as it fulfills national obligations set forth in agreements with partner governments. While some steps have been taken to position the JSF program for success, given its size and importance, additional attention from DOD and the program office would help decrease the risks associated with implementing the international program. In the report we are releasing today, we recommend that DOD ensure that the JSF Program Office and its prime contractors have sufficient information on international supplier planning to fully anticipate and mitigate risk associated with technology transfer and that information concerning the selection and management of suppliers is available, closely monitored, and used to improve program outcomes. Toward this end, DOD and the JSF Program Office need to maintain a significant knowledge base to enable adequate oversight and control over an acquisition strategy that effectively designs, develops, and produces the aircraft while ensuring that the strategy is carried out to the satisfaction of the U.S. services and the international partners. Tools are in place to provide this oversight and management, but they must be fully utilized to achieve program goals. DOD concurred with our report recommendations, agreeing to (1) ensure that Lockheed Martin's JSF international industrial plans are continually reviewed for technology control, export control, and risk mitigation issues and (2) work with Lockheed Martin to achieve effective program oversight when it comes to partner expectations and program goals. While we commend this proactive response, we note that DOD did not provide any detail as to the criteria to be employed for reviewing industrial plans. In addition, DOD did not specify how it plans to collect and monitor information in suppliers or elaborate on other steps the JSF Program Office would take to identify and resolve potential conflicts between partner expectations and program goals. Through decisions made on the Joint Strike Fighter program today, DOD will also influence other acquisition programs like the Missile Defense Agency's suite of land, sea, air, and space defense systems and the Army's Future Combat System. These programs will potentially shape budgetary and strategic military policy for the long term, and as such, need to use every tool available for success. Adopting knowledge-based policies and practices with regard to these critical acquisition programs is an important first step to ensuring that success. Mr. Chairman, that concludes my statement. I will be happy to respond to any questions you or other Members of the Subcommittee may have. For future questions regarding this testimony, please contact Katherine Schinasi, (202) 512-4841. Individuals making key contributions to this testimony include Tom Denomme, Brian Mullins, and Ron Schwenn. 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 Joint Strike Fighter (JSF) is a cooperative program between the Department of Defense (DOD) and U.S. allies for developing and producing next generation fighter aircraft to replace aging inventories. As currently planned, the JSF program is DOD's most expensive aircraft program to date, costing an estimated $200 billion to procure about 2,600 aircraft and related support equipment. Many in DOD consider JSF to be a model for future cooperative programs. To determine the implications of the JSF international program structure, GAO identified JSF program relationships and expected benefits, and assessed how DOD is managing challenges associated with partner expectations, technology transfer, and recent technical concerns. The JSF program is based on a complex set of relationships among governments and industries from the United States and eight partner countries. The program is expected to benefit the United States by reducing its share of program costs, giving it access to foreign industrial capabilities, and improving interoperability with allied militaries. Partner governments expect to benefit financially and technologically through relationships with U.S. aerospace companies and access to JSF program data. Yet international participation also presents a number of challenges. Because of their contributions to the program, partners have significant expectations for financial returns, technology transfer, and information sharing. If these expectations are not met, their support for the program could deteriorate. To realize these financial returns, partners expect their industry to win JSF contracts through competition--a departure from cooperative programs, which directly link contract awards to financial contributions. However, recent actions by the prime contractor could indicate a departure from this competitive approach and a return to directed work share. Technology transfer also presents challenges. Transfers of sensitive U.S. military technologies--which are needed to achieve aircraft commonality and interoperability goals--will push the boundaries of U.S. disclosure policy. In addition, a large number of export authorizations are needed to share project information and execute contracts. These authorizations must be submitted and resolved in a timely manner to maintain program schedules and ensure partner industry has the opportunity to compete for subcontracts. Finally, recent technical challenges threaten program costs and possibly partner participation in the program. While partners can choose to share any future program cost increases, they are not required to do so. Therefore, the burden of any future increases may fall almost entirely on the United States. If efforts to meet any of these partner expectations come into conflict with program cost, schedule, and performance goals, the program office will have to make decisions that balance these potentially competing interests within the JSF program.

AGOA is a trade preference program that provides eligible sub-Saharan African countries duty-free access to U.S. markets for more than 6,000 dutiable items in the U.S. import tariff schedules. AGOA also includes goals related to U.S. government technical assistance in sub-Saharan Africa. Countries must meet certain eligibility criteria to take advantage of AGOA preferences, and the program had 41 such eligible countries as of December 1, 2014. AGOA legislation directs the President to target technical assistance to serve specific TCB-related goals that promote economic reform and development, and to develop and implement certain policies aimed at encouraging investment in sub-Saharan Africa. With regard to technical assistance, AGOA directs the President to focus such assistance on the following goals: 1. Develop relationships between U.S. and sub-Saharan African firms through business associations and networks. 2. Provide assistance to the governments of sub-Saharan African bringing legal regimes into compliance with the standards of the liberalizing trade and promoting exports, making financial and fiscal reforms, and promoting greater agribusiness linkages. 3. Address critical agriculture policy issues such as market liberalization, agriculture export development, and agribusiness investment in processing and transporting agriculture commodities. 4. Increase the number of reverse trade missions to growth-oriented countries in sub-Saharan Africa.5. Increase trade in services. 6. Encourage greater sub-Saharan African participation in future negotiations in the World Trade Organization (WTO) on services and making further commitments to encourage the removal of tariff and nontariff barriers. Trade in services refers to the buying and selling of intangible products and activities; examples of trade-in-services sectors include tourism, financial services, and telecommunications. See GAO, Sub-Saharan Africa: Trends in U.S. and Chinese Economic Engagement, GAO-13-199 (Washington, D.C.: Feb. 7, 2013). manufacturing sectors, including problems with cost and quality of inputs, access to finance, trade logistics such as the high cost of transporting goods, and inadequate workforce skills. The International Finance Corporation, a member of the World Bank Group, has reported that less than a quarter of adults in sub-Saharan Africa have access to formal financial services, and lack of access to finance is a constraint to economic growth overall, and the growth of small and medium-sized enterprises in the region. Another study found that AGOA apparel production is concentrated in low-skill tasks with little knowledge transfer to local workers, and that the global competitiveness of AGOA exporters still depends on the preferences they receive under AGOA. Many AGOA countries lack the capacity to produce and export goods in the necessary quantity and at the quality U.S. markets require. This same challenge may also affect potential investors' decisions about engaging in Africa. Literature on AGOA and TCB has also shown that poor infrastructure conditions in sub-Saharan Africa remain a key challenge that undermines export competitiveness. In 2014, USITC reported that weak transportation infrastructure, including poor rural roads, inefficient port facilities, and burdensome customs procedures are among the impediments to export growth and competitiveness for sub-Saharan Africa. The report noted that a number of factors directly affect the cost and timeliness of delivery of goods to the U.S. market, including distance to market, perishability of products, freight rates, and reliability of trade linkages. Since at least 2001, the United States has provided TCB assistance to developing countries to help them participate in and benefit from global trade. U.S agencies generally define TCB broadly to include all types of development assistance that enhance a country's ability to secure benefits from international trade. Among other things, such assistance can address (1) the regulatory environment for business, trade, and investment; (2) constraints such as low capacity for production and entrepreneurship; and (3) inadequate physical infrastructure, such as poor transport and storage facilities. USAID collects data to identify and quantify the U.S. government's TCB activities in developing countries through an annual survey of U.S. agencies and maintains the survey results in the U.S. government's publicly available online TCB database.This database of TCB funding defines 14 categories of TCB assistance provided by the U.S. government (see app. II for a detailed list of TCB category definitions and examples of related activities). The majority of U.S. TCB funding for AGOA countries from 2001 through 2013 was provided for three categories of activities: trade-related infrastructure, trade-related agriculture, and trade facilitation (see fig. 1). Total U.S. government funding for TCB assistance for AGOA countries from 2001 to 2013 was approximately $5 billion. In that time period, U.S. government TCB assistance for AGOA countries peaked in 2008 and declined sharply in 2012 (see fig. 2). The U.S. government provided funding for TCB assistance from 2001 through 2013 for all 41 AGOA countries. Sixty-eight percent of all U.S. government TCB funding obligated for AGOA countries from 2001 through 2013 was for 10 of these countries (see table 1). Although the President affirmed the U.S. government's commitment to providing TCB assistance for AGOA countries in August 2014, no single agency is responsible. According to our analysis of the U.S. government's TCB database, MCC and USAID are the agencies that reported providing the most funding for AGOA countries, and accounted for 90 percent of all TCB assistance to these countries from 2001 through 2013 (see fig. 3). While USAID funds activities that have clear and direct links to TCB, MCC funds activities that may be more indirectly related to international trade. MCC conducts TCB-related activities that support its broader strategic and agency goals. In contrast, one of USAID's core development objectives is to promote sustainable, broad-based economic growth by helping developing countries increase their exports through trade capacity building. USAID aims to achieve its TCB goal by supporting participation in trade negotiations, implementation of trade agreements, and economic responsiveness to trade opportunities. USAID also collects data to identify and quantify the U.S. government's TCB activities through an annual survey of U.S. agencies and maintains the survey results in the U.S. government's publicly available online TCB database. MCC's TCB-related activities in sub-Saharan Africa are supportive of AGOA. MCC identifies a relationship between AGOA and the agency's role in improving economic growth, including through its trade-related infrastructure activities in selected sub-Saharan African countries. According to agency officials, MCC's focus on economic growth and encouraging private sector investment is in line with the goals of AGOA. Furthermore, agency officials said that MCC infrastructure-related investments have included a number of projects that support global trade in sub-Saharan Africa. From 2005 through 2013, MCC funded TCB activities in 15 of the 41 AGOA countries (see table 2). MCC's TCB funding for AGOA countries has supported a range of TCB activities, largely focused on trade-related infrastructure. MCC's TCB assistance in AGOA countries has covered 10 of the 14 TCB categories, with the majority of funding, over 75 percent, concentrated on trade- related infrastructure (see fig. 4). MCC's trade-related infrastructure projects in AGOA countries cover a range of activities including building roads, improving ports, and expanding access to electricity. For example, MCC compacts in Mozambique and Malawi include large infrastructure components, as described below: Mozambique. MCC signed a compact with Mozambique in 2007 for about $506.9 million, of which about $222 million was obligated for TCB-related activities, mostly concentrated on trade-related infrastructure. This compact included $176 million in trade-related infrastructure assistance for a roads project rehabilitating 491 kilometers of key segments of the country's transportation network. The project aimed to improve access to markets, resources, and services; reduce transport costs for the private sector; and expand connectivity across the region. Malawi. MCC signed a compact with Malawi in 2011 for $350.7 million, and data show that the entire amount was obligated for trade- related infrastructure activities. Specifically, the compact is a single- sector power revitalization project that aims to increase the capacity and stability of the national electricity grid and bolster the efficiency and sustainability of hydropower generation. Officials we spoke to in Ghana and Ethiopia, the two AGOA countries where we conducted fieldwork, highlighted a range of ongoing infrastructure improvements and challenges. Business representatives in Ghana, where MCC funded $240 million in TCB-related assistance, noted that U.S. TCB activities had helped to reduce problems with land transportation. In Ethiopia, a representative from local business noted that infrastructure challenges had been diminished through improvements in transportation, which had reduced costs for importing and exporting goods. Officials and local business representatives in both Ethiopia and Ghana also cited a range of ongoing infrastructure challenges that acted as an impediment to conducting business. For example, in Ethiopia, officials cited infrastructure issues, among others, as an impediment to conducting business in the country, and representatives of local businesses noted that further investment was needed in services such as power, roads, and telecommunications. In addition, officials in Ghana stated that port congestion caused delays, and the manufacturing sector was diminished partly because of a lack of access to reliable power. A partnership among the U.S. government, African governments, the private sector, and others, Power Africa aims to expand access to electricity to households and businesses and increase Africa's global competitiveness. governments to increase internal and regional trade within Africa, and expand trade and economic ties among Africa, the United States, and other global markets. USAID's TCB funding has supported a range of TCB activities for AGOA countries, with trade-related agriculture and trade facilitation being the two largest categories. USAID has funded TCB assistance activities in 39 of 41 AGOA countries; see table 3 for AGOA countries with the highest USAID TCB funding. USAID's TCB assistance activities in AGOA countries covers all 14 TCB categories, with the majority of funding, over 75 percent, concentrated on trade-related agriculture, trade facilitation, and trade-related infrastructure (see fig. 5). From 2002 to 2004, USAID established three regional trade hubs in sub- Saharan Africa that serve as primary implementers of U.S. TCB These USAID- assistance for sub-Saharan African countries (see fig. 6).funded trade hubs are staffed with regional advisers who provide a range of services to U.S. agencies, African governments, and the private sector, noted as follows: East Africa trade hub, established in Nairobi, Kenya, in 2002. This hub aims to increase food security and economic growth in the following 9 East or Central African countries: Burundi, Ethiopia, Kenya, Madagascar, Mauritius, Rwanda, South Sudan, Tanzania, and Uganda. West Africa trade hub, established in Accra, Ghana, in 2003. This hub focuses on addressing critical issues that hamper export competitiveness such as high transport and telecommunications costs, limited access to finance, and inconsistent implementation of regional trade policies in 20 West African countries: Benin, Burkina Faso, Cameroon, Cape Verde, Chad, Cote d'Ivoire, Gabon, The Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Sao Tome and Principe, Senegal, Sierra Leone, and Togo. Southern Africa trade hub, established in Gaborone, Botswana, in 2004. This hub's primary goals are to increase international competitiveness, as well as intraregional trade and food security, by promoting greater competitiveness in agriculture value chains, increasing investment and export opportunities in the textile and apparel sector, and supporting a better business-enabling environment in 8 Southern African countries: Botswana, Lesotho, Malawi, Mozambique, Namibia, South Africa, Swaziland, and Zambia. Along with implementing activities to support U.S. initiatives in areas such as food security, USAID-funded trade hubs seek to support trade facilitation, market linkages, and information awareness about AGOA to AGOA-exporting firms and countries. For example, from 2007 through 2012, USAID provided funding for activities implemented through the West Africa trade hub to address economy-wide constraints such as the transport and trade barriers affecting the region's ports, corridors, and borders. The trade hub established an advocacy campaign to address such trade barriers and help decrease the costs associated with trading. The trade hub also worked with governments in the region to establish border information centers that help stakeholders coordinate, and provide information and assistance to traders at borders to ease transport bottlenecks. The trade hub in East Africa has helped subsidize the cost to exporters of attending trade shows to gain exposure to U.S. markets in sectors including leather goods and apparel, and has facilitated U.S. buyers going to sub-Saharan Africa. Among its trade-related agriculture activities, the Southern Africa trade hub has provided training to medium- and large-scale commodity buyers and storage operators trading in maize and soybeans to help reduce postharvest loss and improve procurement practices. Officials we spoke to in Ethiopia and Ghana cited some improvement in areas where USAID has provided TCB assistance while highlighting other ongoing challenges related to facilitating exports under AGOA. Although the West Africa trade hub began efforts in 2009 to help facilitate financial services for local companies, local business representatives from the cashew and shea industries in Ghana said lack of access to finance and the business community's lack of awareness on how to use AGOA remain challenges to utilizing AGOA. A representative of the horticulture industry in Ethiopia cited inefficient customs processes and lack of access to finance in the country as challenges to more fully utilizing AGOA. He also said that while certain logistical challenges had been addressed in terms of direct airline routes to the United States, increasing awareness of the Ethiopian flower industry would help improve access to the U.S. market. The owner of a textile goods company who had exported products under AGOA said he was unable to obtain certain inputs for his products in Ethiopia, a fact that affected decisions on what to produce. Furthermore, he said local businesses were rudimentary when AGOA was signed, and are only now building export capacity and an understanding of the U.S. market. A business representative from the apparel industry said that logistics remain a challenge to exports because of high transportation costs that may discourage potential buyers. He noted the high cost of moving shipments from Ethiopia to the port in Djibouti, and also that lengthy transport schedules create longer lead times to fill orders. Like other members of the private sector we spoke to, he said that local companies have limited access to capital, and that obtaining financing requires a number of bureaucratic steps. USAID works with some host governments to develop strategic approaches to increasing AGOA utilization. As previously noted, one of USAID's core development objectives is to promote sustainable, broad- based economic growth by helping developing countries increase their exports through trade capacity building. AGOA legislation also directs the President, in part, to target assistance to sub-Saharan African governments. USAID has identified trade hubs as primary implementers of TCB assistance to African governments and organizations, among others. USAID, partly through the trade hubs, has supported AGOA utilization by collaborating with African governments to develop AGOA- specific or national export strategies. In the strategy documents, host governments may identify high-priority trade and investment sectors, constraints related to AGOA utilization, and specific steps to increase exports under AGOA. For example, the East Africa trade hub participated in a 2013 workshop with officials from the Mauritian government, and helped the host government develop and publish its AGOA-specific national strategy, which aims to support the ability of Mauritian firms to sell to the U.S. market and leverage opportunities that AGOA provides. Data from USAID also indicate that trade hubs provided input toward strategies that the Gambia and Senegal have developed. We previously identified the importance of strategic planning efforts in results-oriented management. Specifically, we found that such strategic planning efforts are the starting point and foundation for defining what the organization seeks to accomplish, and in identifying the strategies it will use to achieve desired results. Furthermore, developing a strategic plan can help clarify organizational priorities and unify staff in the pursuit of shared goals. If done well, strategic planning fosters informed communication between the organization and its stakeholders. In the case of AGOA utilization, this may include collaboration between U.S. and host governments, and the private sector. Literature and trade hub reports have noted the potentially positive effects such strategies can have on countries' utilization of AGOA. USAID, through its trade hubs, has stated that identifying strategic needs and priorities through national strategies can bolster AGOA utilization. For example, in a 2013 report prepared for USAID, the West Africa trade hub noted the importance of a strategy as part of leveraging trade preferences, and the role that USAID and other U.S. agencies can play in encouraging strategy development. countries, including Burkina Faso and Sierra Leone, that have implemented strategies as tools to better utilize AGOA. Similarly, the East Africa trade hub reported that national strategies reflect host governments' strategic needs in approaching the U.S. market and outline ways governments can utilize AGOA. According to contractors who implement activities at one of the trade hubs, export strategies allow governments to target specific sectors and work with the private sector toward a unified approach. CARANA Corporation, West Africa Trade Hub Final Report, a report prepared at the request of USAID, August 2013. African leaders have also articulated the importance of strategic approaches to enhancing AGOA utilization. At the 2011 AGOA Forum held in Zambia, an African trade minister underscored the importance of clear AGOA national strategies because they help ensure that countries assess export promotion challenges in a coordinated manner, and U.S. agency officials said that African leaders had committed to developing more AGOA-related strategies at the August 2014 Africa Leaders Summit. Furthermore, in a January 2014 testimony to USITC, a senior African official said AGOA countries have recognized the need to address various supply-side constraints that have hindered AGOA utilization, including poor infrastructure, by developing a coordinated, strategic response at the national level. This official also noted that this strategic exercise would enable AGOA countries to identify supply-side constraints and potential responses, and may ultimately enable the U.S. government to better support African countries. For example, the Ethiopian government has drafted a national strategy that identifies high-priority industries that align with AGOA trade preferences. While this document is still in draft form, the Ethiopian trade ministry notes that its AGOA national strategy is an important part of the country's overall growth plan, given that AGOA is a useful market opportunity to achieve Ethiopia's larger economic growth objectives. According to officials, the government also plans to establish an AGOA center to oversee implementation of the strategy. Though USAID has made efforts to work with host governments on developing strategic approaches to AGOA utilization, 14 out of the 41 current AGOA countries have such strategies in place, according to data from USAID (see fig. 7). According to a white paper from the United Nations Economic Commission for Africa and the African Union, the lack of a strategic approach on AGOA is a significant reason for gaps in AGOA utilization. A 2011 Brookings Institution report identified the lack of an AGOA national strategy as one factor inhibiting Ghana from fully benefitting from AGOA. According to officials and information from trade hubs, AGOA countries may lack these strategies because such efforts have not been prioritized in work plans, and because of an absence of political will among host governments. Specifically, in its work plans for all three trade hub contracts, USAID has noted the importance of coordinating with bilateral USAID missions, regional entities in sub-Saharan Africa, and host governments, among others. However, USAID only included the development of national strategies as a high-priority task for the East Africa trade hub, and not for the West and Southern Africa trade hubs. Furthermore, a lack of host government interest could influence the effectiveness of such efforts. A West Africa trade hub report noted that political will is needed to sustain strategy development efforts in those AGOA countries that lack such strategies. USAID officials also said that host governments must request and initiate the process of developing these strategies, and the lack of political will to motivate these efforts may be one reason some AGOA countries do not have such a strategic approach. For example, according to literature, some USAID TCB assistance programs in sub-Saharan Africa have faced challenges in gaining buy-in from regional participating governments and in ensuring agreement on the direction and pace of adoption of relevant processes and procedures. USAID officials acknowledged they could do more to work with host governments on strategy development to enhance AGOA utilization, and officials said they are starting to work with regional entities to develop strategic approaches to export promotion. The U.S. government has acknowledged the importance of providing TCB assistance in support of AGOA, and U.S. agencies have obligated approximately $5 billion in TCB assistance for AGOA countries over a 13- year period. As Congress deliberates reauthorization of the AGOA program, policymakers have expressed interest in enhancing eligible countries' ability to utilize the program and ensuring that TCB assistance is aligned with the program's objectives. A strategic approach to AGOA utilization can help eligible countries leverage U.S. TCB efforts and trade preferences under AGOA, while a lack of a strategic approach to AGOA can result in gaps in program utilization. Although USAID has worked with some host governments from AGOA countries to develop strategic approaches to program utilization, about a third of the 41 AGOA countries currently have strategies that reflect AGOA priorities. USAID has not prioritized the development of these strategies for all three of its regional trade hubs, which play a significant role in implementing TCB in AGOA countries and working with host governments. A lack of political will among host governments may also pose challenges to developing and sustaining strategic approaches related to AGOA. In developing these approaches, eligible countries can identify trade barriers that inhibit AGOA utilization and articulate a commitment to addressing these barriers. Such strategies could also assist U.S. agencies in ensuring that TCB assistance is aligned with host government priorities and is addressing gaps in AGOA utilization. To enhance eligible countries' ability to utilize the AGOA program and ensure that TCB assistance is aligned with program objectives, we recommend that the Administrator of USAID work with more host governments to develop strategic approaches to promoting exports under AGOA. We received written comments on a draft of this report from USAID, which are reprinted in appendix III. USAID stated that it agreed with the report's overall findings, conclusions, and recommendations. USAID also made a number of observations and comments related to the findings and recommendation in the report. USAID commented that our report does not provide sufficient data to demonstrate the linkage between host government strategic approaches and AGOA utilization. However, as we point out in our report, such strategies can have potentially positive effects on countries' utilization of AGOA. We cite prior GAO work that notes the importance of strategic planning efforts in results-oriented management; and literature, trade hub reports, and statements from African leaders that also emphasize the importance of strategic approaches to enhancing AGOA utilization. USAID stated that our report does not include the point that the productivity of African businesses is negatively impacted by a lack of access to reliable electricity. However, our report does in fact note observations from our field work in Ghana and Ethiopia regarding challenges resulting from lack of access to power. Finally, USAID explained that its trade hubs are designed as regional programs and therefore often prioritize regional efforts over bilateral strategy development. In our report we acknowledge the regional focus of USAID-funded trade hubs and also note that USAID is starting to work with regional entities to develop strategic approaches to export promotion. Commerce, State, the Treasury, MCC, USITC, and USTR also received a draft copy of the report but did not provide formal comments. USAID, USITC, and USTR provided technical comments, which we have incorporated in the report, as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretaries of Commerce, State, and the Treasury; the Chief Executive Officer of MCC; the Administrator of USAID; the Chairman of USITC; the U.S. Trade Representative; and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8612 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 objectives were to examine (1) U.S. government trade capacity building (TCB) assistance in support of the African Growth and Opportunity Act (AGOA), and (2) the extent to which the U.S. Agency for International Development (USAID) has made efforts to develop strategic approaches to AGOA utilization. To address both objectives, we interviewed officials from the Departments of Commerce, State, and the Treasury; the Millennium Challenge Corporation (MCC); and USAID, but focused on MCC and USAID for the purposes of this report because these agencies obligated the highest amounts of TCB funding from fiscal years 2001 through 2013. We also interviewed officials from the Office of the U.S. Trade Representative and the U.S. International Trade Commission (USITC), agencies that do not provide funding for U.S. TCB assistance but provided additional contextual information on AGOA and TCB. We reviewed documents including literature on AGOA and TCB; statements of work, evaluations, and annual reports for the three USAID-funded trade hubs; program documents for MCC activities in sub-Saharan Africa; and examples of AGOA-specific and national export strategies. We also conducted fieldwork in Ethiopia and Ghana, countries we selected because they represented a cross section of U.S. TCB assistance and are in different regions within sub-Saharan Africa, thereby also providing insight on two out of the three trade hubs. In each country, we interviewed U.S. agency officials, host government officials, representatives from the private sector who had insights on U.S. TCB assistance, and contractors implementing TCB activities. Our findings from these countries are not generalizable to the universe of all U.S. TCB activities. To examine U.S. government TCB assistance in support of AGOA, we reviewed documents from relevant U.S. agencies, including program descriptions and evaluations, and analyzed data on U.S. TCB funding to AGOA countries. We focused our analysis on the U.S. agencies that provided the highest amounts of TCB funding for AGOA countries from fiscal years 2001 through 2013. We analyzed data USAID provided on annual U.S. TCB obligations for activities in all AGOA countries from fiscal years 2001 through 2013 by year, agency, country, and TCB category. These data are reported in the U.S. government TCB database, but we requested data directly from USAID to facilitate our analysis of the data for the purposes of this report. We also relied on the data and information from the TCB database, such as TCB activity descriptions. In our analysis of TCB funding data, we built upon information collected for prior GAO reports on TCB that used data from the TCB database. Data from the TCB database were deemed reliable for our prior reports on TCB. For this report, we determined that the data were sufficiently reliable to identify TCB funding by agency, country, category, and year. Furthermore, in assessing the data, we interviewed key USAID officials responsible for administering the database and reviewed supporting documentation. To examine the extent to which USAID has made efforts to develop strategic approaches to AGOA utilization, we reviewed documents from relevant U.S. agencies, including program descriptions and evaluations, and information on AGOA-specific and national export strategies from U.S. agencies and host governments. In addition, we discussed the development of these strategic approaches with U.S. and foreign government officials. We conducted this performance audit from March 2014 to January 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. As we noted in 2011, the U.S. Agency for International Development (USAID) collects data to identify and quantify the U.S. government's trade capacity building (TCB) activities in developing countries through an annual survey of U.S. agencies. The U.S. government TCB database defines the categories as follows: World Trade Organization (WTO) Accession and Compliance: support for countries to benefit from membership in the WTO, or to understand fully the benefits of membership. Also assistance to help countries in the WTO accession process meet the requirements of accession. This category includes assistance to meet the obligations of the specific WTO agreements, except for Agreements on Sanitary and Phyto-Sanitary Measures (SPS), Technical Barriers to Trade (TBT), Intellectual Property Rights (IPR), and Trade-related Procurement. Those four agreements benefit from TCB in their own categories. Sanitary and Phyto-Sanitary Measures: support for countries to meet SPS standards for trade and to comply with the WTO Agreement on SPS. Technical Barriers to Trade: support for countries to reduce technical barriers to trade and to comply with the WTO Agreement on TBT. Intellectual Property Rights: support for countries to observe international standards on intellectual property rights protection and to comply with the WTO Agreement on IPR. Trade-Related Procurement: support for increased trade related to government procurement and to comply with the WTO Agreement on Government Procurement. Trade Facilitation: generally defined as assistance in lowering the costs of engaging in, or eliminating obstacles to, international trade flows. Trade facilitation (for 2011) is a sum of the following four subcategories: Customs Operations: includes assistance to help countries modernize and improve their customs offices. Trade Promotion: includes assistance to increase market opportunities for developing country and transition economy producers. Enterprise Development: includes support to improve the associations and networks in the business sector, as well as to enhance the skills of business people engaged in trade. Also includes assistance to help countries acquire and use information technology to promote trade by creating business networks and disseminating market information. Free Trade Agreements (FTA) and Trade Integration: includes assistance to an FTA, a regional trade agreement (RTA), or an individual country that increases the ability of the RTA to facilitate trade. It can also include assistance to a potential member of an RTA that improves the analytical capacity of the country's government with respect to RTA issues. Trade-Related Labor: assistance to support the enforcement of labor standards and worker rights, development of trade unions and dispute resolution mechanisms, strategies for workforce development and worker training, and the elimination of child labor. Financial Sector: support for financial sector work, monetary and fiscal policy, exchange rates, commodity markets, and capital markets. Trade-Related Infrastructure: assistance to establish trade-related telecoms, transport, ports, airports, power, water, and industrial zones. Environmental Sector Trade and Standards: assistance to establish environmental standards or to promote environmental technology. Competition Policy, Business Environment, and Governance: support for the design and implementation of antitrust laws, as well as of laws and regulations related to investment and investor protections. Includes support for legal and institutional reform to improve governance and make policies more transparent, and assistance to help the different agencies of a host country government function more effectively in the trade policy arena. Trade-Related Agriculture: support for trade-related aspects of the agriculture and agribusiness sectors. Trade-Related Services: includes support to help developing countries and transition economies increase their flows of trade in services. Services Trade Development is a sum of two subcategories: Trade-Related Services (excluding tourism): assistance to help countries develop trade in services in all sectors other than tourism, including financial services, energy, transportation, and education. Trade-Related Tourism: assistance to help countries expand their international tourism sectors, including eco-tourism. Other Trade Capacity Building: A small number of TCB activities did not fit in any of the above categories, including some activities of a crosscutting nature. These were categorized as "Other Trade Capacity Building." In addition to the contact listed above, Juan Gobel (Assistant Director), Diana Blumenfeld, Farhanaz Kermalli, Farahnaaz Khakoo-Mausel, and Ben Sclafani made key contributions to this report. Godwin Agbara, Debbie Chung, Qahira El'Amin, Etana Finkler, Ernie Jackson, and Jill Lacey provided additional assistance. Foreign Assistance: USAID Should Update Its Trade Capacity Building Strategy. GAO-14-602. Washington, D.C.: Sept. 10, 2014. African Growth and Opportunity Act: Observations on Competitiveness and Diversification of U.S. Imports from Beneficiary Countries. GAO-14-722R. Washington, D.C.: July 21, 2014. Sub-Saharan Africa: Trends in U.S. and Chinese Economic Engagement. GAO-13-199. Washington, D.C.: Feb. 7, 2013. Foreign Assistance: The United States Provides Wide-ranging Trade Capacity Building Assistance, but Better Reporting and Evaluation Are Needed. GAO-11-727. Washington, D.C.: July 29, 2011. U.S.-Africa Trade: Options for Congressional Consideration to Improve Textile and Apparel Sector Competitiveness under the African Growth and Opportunity Act. GAO-09-916. Washington, D.C.: Aug. 12, 2009. International Trade: U.S. Trade Preference Programs: An Overview of Use by Beneficiaries and U.S. Administrative Reviews. GAO-07-1209. Washington, D.C.: Sept. 27, 2007. Foreign Assistance: U.S. Trade Capacity Building Extensive, but Its Effectiveness Has Yet to Be Evaluated. GAO-05-150. Washington, D.C.: Feb. 11, 2005.

Signed in 2000, AGOA directs the President to provide TCB assistance to sub-Saharan African governments and firms to promote exports and develop infrastructure, among other things. AGOA provides duty-free access on qualifying U.S. imports from eligible sub-Saharan African countries, a total of 41 countries as of December 1, 2014. From 2001 through 2013, U.S. agencies funded about $5 billion in TCB assistance to AGOA countries. GAO was asked to review various issues related to the ability of AGOA countries to utilize AGOA prior to its expiration on September 30, 2015. In this report, GAO examines (1) U.S. government TCB assistance in support of AGOA, and (2) the extent to which USAID has made efforts to develop strategic approaches to AGOA utilization. GAO focused on MCC and USAID because these two agencies accounted for nearly 90 percent of funding for TCB activities in AGOA countries from 2001 through 2013. GAO analyzed data on U.S. TCB assistance to AGOA countries in this period, reviewed agencies' funding and program documents, conducted interviews with officials who implement U.S. TCB assistance, and met with U.S. and foreign government officials and private sector representatives in Ethiopia and Ghana. Among U.S. agencies, the Millennium Challenge Corporation (MCC) and the U.S. Agency for International Development (USAID) have funded the majority of trade capacity building (TCB) assistance in support of the African Growth and Opportunity Act (AGOA) (see figure). MCC obligated nearly $3 billion in funding for TCB activities in 15 of the 41 countries eligible for AGOA (AGOA countries), with the majority of funds provided for trade-related infrastructure projects. For example, MCC obligated $176 million for a roads project in Mozambique that aimed to improve the transportation network, including access to markets and reduction of transport costs. USAID obligated approximately $1.6 billion in funding for TCB activities in 39 of the 41 AGOA countries, with the majority of funds provided for trade-related agriculture and infrastructure, and trade facilitation. For example, USAID funded activities to help exporters in East Africa build business linkages with U.S. markets through trade shows. Note: Funding amounts or percentages may not sum to totals because of rounding. USAID has worked with some host governments to develop strategic approaches to AGOA utilization; however, most host governments have not established such approaches. USAID-funded regional trade hubs in sub-Saharan Africa have supported AGOA utilization by, among other things, collaborating with some host governments to develop AGOA-specific or broader national export strategies. Trade hub evaluations and statements from host government officials show that identifying strategic needs and priorities through strategic approaches can bolster AGOA utilization and help assess challenges to expanding exports. In strategy documents, host governments may identify high-priority trade and investment sectors, constraints related to AGOA utilization, and specific steps to increase exports under AGOA. Lack of a strategic approach has been identified as a significant reason for gaps in AGOA utilization. As of December 2014, 14 of the 41 AGOA countries had strategies reflecting AGOA priorities. According to USAID officials, host governments must initiate the process of developing a strategy, and a lack of political will may pose challenges to such efforts. GAO recommends that the Administrator of USAID work with more host governments to develop strategic approaches to promoting exports under AGOA. USAID agreed with the recommendation.

Traditionally, DOD's combat aircraft have used on-board electronic warfare devices called jammers for self-protection against radar-controlled weapons, including missiles and anti-aircraft artillery. These jammers emit electronic signals from the aircraft to try to impede or deny the threat radar's ability to locate the aircraft. DOD's existing self-protection jamming systems for its tactical aircraft have limitations against certain threats, and these threats are expected to be improved. DOD has modified existing systems, such as the Air Force's ALQ-131 used on the F-16 and the ALQ-135 on the F-15, and has developed a newer system, the Navy's Airborne Self-Protection Jammer (ASPJ), which is being used on some F-14D and F/A-18C/D aircraft. As we have previously reported, however, testing after deployment has shown that the modified jammer systems have had problems, while operational testing of ASPJ and other jammers showed they were unable to meet effectiveness criteria against certain classified threats. In an attempt to overcome the limitations of the on-board jammers, the services are acquiring two new towed decoy systems, the ALE-50 and the RFCM, to enhance survivability against the radar-controlled threats. The ALE-50 towed decoy system is in production, while the future RFCM system is in development. The ALE-50's towed decoy component generates and emits its own signals that are intended to lure an incoming radar-guided weapon away from the aircraft by presenting a more attractive target. To provide further improvement for selected Air Force and Navy aircraft, the RFCM is to provide more sophisticated techniques than the ALE-50. A jamming device called the techniques generator carried onboard the aircraft produces jamming signals that are transmitted by fiber optic cable to the RFCM decoy for transmission. Both decoys are single use systems. Once deployed from the aircraft, the decoy's tow line is severed prior to return to base. Each aircraft is to carry multiple decoys, so if one is destroyed by enemy fire or malfunctions, another can be deployed. Therefore, substantial inventories of decoys are required to sustain potential combat operations. The services expect that these decoys will improve survivability of their aircraft against radar-controlled threats compared to the current technique of emitting the jamming signals directly from the aircraft. Classified test results show that the ALE-50 towed decoy offers improved effectiveness against radar-controlled threats, including some threat systems against which self-protection jammers have shown little to no effectiveness. Moreover, the future RFCM decoy system is expected to further improve survivability due to its more sophisticated jamming techniques. Recognizing the potential offered by these towed decoy systems to overcome the limitations of using just on-board jammers, such as the ASPJ, the Air Force is actively pursuing the use of towed decoys for its current aircraft. It has done the necessary modifications to add the ALE-50 to the F-16, an aircraft slightly smaller than the Navy's F/A-18C/D, and to the B-1, a much larger aircraft. The Air Force is also considering use of the RFCM decoy system on the F-15, which will use its existing on-board jammer instead of the techniques generator, and on the B-1, as well as several other aircraft. The Navy plans to equip only its future F/A-18E/F aircraft with a decoy system. The ALE-50 decoy system is to be used by the Air Force on 437 F-16 and 95 B-1 aircraft. In addition to the ALE-50 components such as the launcher and controller installed on the aircraft, the Air Force plans to procure 17,306 ALE-50 decoys to meet operational requirements. The Navy plans to buy 466 ALE-50 decoys. These will be used for F/A-18E/F testing and contingencies after the aircraft's deployment until the RFCM decoy is available. The ALE-50 program cost is estimated at about $1.2 billion. The Navy's estimated RFCM cost for its F/A-18E/F aircraft is about $2.6 billion. The Navy's plan is to procure enough RFCM systems and spares to equip and support 600 of its planned buy of 1,000 F/A-18E/F aircraft. For 600 F/A-18E/F aircraft, the number of decoys to be procured to meet operational needs is 18,000. (These estimates predate the May 1997 decision of the Quadrennial Defense Review (QDR) to recommend a reduction in the number of F/A-18E/Fs.) The future RFCM decoy system is also being considered by the Air Force for its B-1 aircraft, part of its F-15 fleet, and several other Air Force manned and unmanned aircraft. If the Air Force buys the RFCM system for the B-1 and the F-15, which would use its existing onboard jammer instead of the RFCM techniques generator, the estimated cost, including 9,107 decoys, is about $574 million. In contrast with the Air Force, which intends to use decoys to improve the survivability of its current aircraft, current Navy combat aircraft will be at a comparative survivability disadvantage since they will not be provided with a decoy system. In particular, because F/A-18E/Fs will not be replacing all of the C/D models in the Navy/Marine Corps inventory in the foreseeable future, adding a towed decoy system to the F/A-18C/D potentially offers the opportunity to save additional aircraft and aircrew's lives in the event of hostilities. In the year 2010, more than 600 of the Navy's tactical fighter inventory objective of 1,263 aircraft will still be current generation fighters such as the F/A-18C/D. This will be true even if F/A-18E/Fs are procured at the Navy's desired rates of as high as 60 per year. At the post-QDR suggested rate of 48 per year, almost 50 percent of the current generation aircraft will still be in the fleet in the year 2012. DOD and the Navy have done studies to determine whether towed decoys could improve the survivability of the F/A-18C/D. DOD's Joint Tactical Electronic Warfare Study and an analysis conducted by the Center for Naval Analyses concluded that the addition of a towed decoy system to the F/A-18C/D would provide a greater increase in survivability for that aircraft than any jammer, including the ASPJ. In limited flight testing on the F/A-18C/D, the Navy demonstrated the ALE-50 decoy could be deployed from either a wing station or the centerline station of the aircraft. While the Navy acknowledges that towed decoys can enhance aircraft survivability, it does not consider these flight tests to have been successful because of the following suitability concerns. According to the Navy (1) the tow line can come too close to the horizontal tail or the trailing edge flap when deployed from a wing station, making it unsafe or (2) the tow line can be burned off by the engine exhaust or separated by abrasion if deployed from the centerline station. The Navy's report on the wing station testing stated that tow line oscillation led to lines breaking on several flights, but did not state that the decoy system was a flight safety risk nor that there was any contact with the horizontal tail or flaps. Concerning the centerline station tests, several tow lines were burned off or otherwise separated from the aircraft by abrasion during maneuvering flights. A reinforced tow line later solved these problems and the Navy is continuing testing on the F/A-18C/D from the centerline station. Based on these test results, the Navy now intends to deploy the ALE-50 decoy from the centerline of the fuselage of the F/A-18E/F. The Navy also maintains that even if the decoy could be successfully deployed from the F/A-18C/D wing or centerline station, for actual operations, it could not afford to trade a weapon or fuel tank on a wing or centerline station for a towed decoy system. Further, the Navy considers modification of the C/D model's fuselage for internal carriage of the decoy to be unaffordable due to volume, weight, power, and cooling constraints that would have to be addressed. The Air Force has modified a wing pylon to successfully deploy towed decoys from the F-16's wing while avoiding major aircraft modifications and without sacrificing a weapons station or a fuel tank. The Navy, however, has not done the technical engineering analyses to determine the specific modifications necessary to accommodate a towed decoy on the F/A-18C/D either from the wing or the centerline without affecting the carriage capability unacceptably. Congress has expressed concerns regarding F/A-18C/D survivability. The Report of the Senate Appropriations Committee on the National Defense Appropriations Act for Fiscal Year 1997 directed the Navy to report on the advantages and disadvantages of using various electronic warfare systems to improve F/A-18C/D survivability. In addition, Congress provided $47.9 million in fiscal year 1997 funding not requested by DOD to buy 36 additional ASPJs for 3 carrier-deployed squadrons to meet contingency needs. The Navy could have addressed the congressional concern for C/D survivability in the required report by including analysis of the improvement offered by incorporating the ALE-50 and RFCM towed decoy systems. In completing the required report, however, the Navy did not include any analysis of survivability benefits from using towed decoys because it maintains, as described above, that there are unacceptable impacts associated with towed decoys on the F/A-18C/D. In commenting on a draft of this report, DOD agreed that towed decoy systems could enhance aircraft survivability, but stated the Navy had conducted an engineering analysis that concluded any installation option of a towed decoy on the F/A-18C/D has unacceptable operational and/or safety of flight impacts. In response to our request for this analysis, the Navy provided us with a paper discussing the feasibility of installing a towed system on the F/A-18C/D. This paper concluded that the options considered had risks or created operational concerns but did not conclude that these options were unacceptable. Furthermore, the paper did not consider all possible options. With regard to the safety of flight issue, the Navy stated that the decoy or towline might contact aircraft control surfaces such as the flaps or the horizontal stabilizers if deployed from a wing station. The Navy's summary of wing station test results, however, does not show any evidence of such contact. The Navy has expressed no concern about a safety of flight issue when deploying the decoy along the aircraft's centerline and continues to fly test missions with the towed decoy, deploying it from a pod on the centerline of an F/A-18D aircraft. Furthermore, the Navy intends to install the system in the fuselage and deploy towed decoys from the centerline of the E/F model aircraft. In addition, the Air Force incorporated the ALE-50 on to the F-16 without loss of a weapon station or fuel tank and without having to undertake major aircraft modifications, demonstrating that it is possible to adapt a towed decoy system to an existing aircraft without creating unacceptable tactical impacts. DOD did not concur with the recommendations that were set forth in a draft of this report. In the draft, we had suggested that (1) in preparing its congressionally required report, DOD consider F/A-18C/D aircraft upgraded with RFCM and ALE-50 towed decoy systems and (2) the Navy do the necessary engineering analyses of the modifications needed to integrate towed decoys into F/A-18C/D and other current Navy aircraft. DOD completed the congressionally required report without implementing our first draft recommendation. We continue to believe, however, that the Navy needs to explore ways to improve the survivability of its current aircraft and, therefore, should do a detailed engineering analysis of the modifications needed to adapt the towed decoy to the F/A-18C/D. DOD's comments are reprinted as appendix I in this report. We recommend that the Secretary of Defense direct the Secretary of the Navy to make a detailed engineering analysis of the modifications needed to adapt the towed decoy to the F/A-18C/D. In light of the demonstrated improvement in survivability that analyses and test results indicate towed decoy systems can provide, and recognizing that in the year 2010 almost 50 percent of the Navy's tactical fighter inventory will still be current generation fighter aircraft such as the F/A-18C/D, Congress may wish to direct the Navy to find, as it has done for its F/A-18E/F and the Air Force has done for the F-16, cost-effective ways to improve the survivability of its current aircraft. To accomplish our objective of determining whether towed decoys could improve survivability of Air Force and Navy aircraft, we examined DOD and contractor analyses of adding towed decoy systems and reviewed Air Force and Navy ALE-50 test results from testing on a variety of aircraft. We interviewed officials from the Office of the Secretary of Defense, the Navy, and the Air Force involved in the acquisition and testing processes of towed decoy systems. We also interviewed contractor personnel involved in the development, integration, and/or production of towed decoy systems. We performed our work at the Offices of the Secretaries of Defense, the Navy, and the Air Force; F-15, F-16, and B-1 System Program Offices at the Air Force Material Command, Wright-Patterson Air Force Base, Ohio; F/A-18 and Tactical Air Electronic Warfare Program Offices at the Program Executive Office for Naval Tactical Aviation, Naval Air Systems Command, Washington, D. C.; the 53rd Wing and Air Force Operational Test and Evaluation Detachment, Eglin Air Force Base, Florida; and selected contractor locations, including McDonnell-Douglas Aircraft, Lockheed-Martin, and Rockwell International. We performed our review from February 1996 to July 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense, the Navy, and the Air Force; the Director, Office of Management and Budget; and other congressional committees. We will make copies available to others upon request. Please contact me on (202) 512-2841, if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. Following are our comments on the Department of Defense's (DOD) letter dated May 5, 1997. 1. Our draft report included references to the comparability of F/A-18E/F and C/D survivability, and it was provided to DOD for comment prior to the decision to produce the F/A-18E/F. As DOD states, this decision has now been made. Consequently, we have deleted references to the comparability of the F/A-18E/F and C/D models. The issue of F/A-18C/D survivability remains important, however, because E/F models will not replace all of the current C/D models in the inventory in the foreseeable future. 2. Test results for towed decoys on the F/A-18C/D and other information provided by DOD and the Navy do not support DOD's statements. The safety of flight issue, according to the Navy, arises from the concern that the decoy or towline might contact aircraft control surfaces such as the flaps or the horizontal stabilizers if deployed from a wing station. The Navy's summary of wing station test results does not show any evidence of such contact. According to the test report, the Navy did find that aircraft vortices behind the wing created aerodynamic instability in the towline, but the report does not conclude that this potentially jeopardized aircraft flight safety. Additionally, the Navy has expressed no concern about a safety of flight issue when deploying the decoy along the aircraft's centerline, and use of a reinforced towline appears to have eliminated the burnoff/abrasion problem. Thus, the Navy continues to fly test missions with the towed decoy, deploying it from a pod on the centerline of an F/A-18D aircraft, and intends to install the system in the fuselage and deploy towed decoys from the centerline of the E/F model aircraft. This evidence indicates that Navy concerns about a high degree of difficulty, and severe volume, weight, power, cooling, and aircraft aerodynamics issues associated with installing towed decoys may not be insurmountable. As for unacceptable tactical impacts associated with towed decoy installation, the Air Force has overcome this problem on the F-16, and we presume that the Navy may also be able to find an integration solution for the F/A-18C/D that avoids unacceptable tactical impacts if it continues to pursue alternatives. The Navy did not abandon towed decoy installation for the F/A-18E/F because of early problems with abrasion and heat breaking the towline. Instead, it pursued alternatives. The solutions for the F-16 and F/A-18E/F do not have to be the only alternatives considered for the F/A-18C/D. 3. The Navy and DOD did provide us with additional information intended to bolster its broad assertion of unsuitability. However, the information provided was not an "engineering analysis" (implying a technical document of some depth), but is instead a rather superficial "installation feasibility study" that while identifying risk areas associated with installing the towed decoy on the F/A-18C/D does not conclude that all installation options have unacceptable operational and/or safety of flight impacts. 4. According to the Navy's feasibility study, 220 pounds is the weight of the towed decoy system mounted in a pod. According to the same study, if the system's launch controller is mounted in the aircraft's fuselage, the bring-back weight is reduced by only 140 pounds. In any case, since studies and test results indicate the ALE-50 system can provide significant improvements in survivability, the Navy needs to determine whether loss of a relatively small amount of bring-back weight is worth the increased risk of losing aircraft to radar-guided missiles. 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GAO reviewed the Department of Defense's (DOD) acquisition plans for the ALE-50 towed decoy system and the Radio Frequency Countermeasures System (RFCM), which includes a more advanced towed decoy, focusing on whether towed decoys could improve the survivability of certain Navy and Air Force aircraft. GAO noted that: (1) DOD's effort to improve the survivability of its aircraft through the use of towed decoys has demonstrated positive results; (2) according to test reports and test officials, the ALE-50 has done very well in effectiveness testing and the future RFCM decoy system is expected to be even more capable; (3) the Air Force is actively engaged in efforts to field towed decoy systems on a number of its current aircraft, including the F-15, F-16, and B-1, while the Navy is planning towed decoys only for its future F/A-18E/F; (4) in the year 2010, almost 50 percent of the Navy's tactical fighter inventory will still be current generation fighter aircraft such as the F/A-18C/D, even if new F/A-18E/Fs are procured at the rates desired by the Navy between now and then; and (5) improving the survivability of the F/A-18C/D, as well as other current Navy and Marine Corps aircraft, potentially offers the opportunity to save additional aircraft and aircrew's lives in the event of future hostilities and also addresses congressional concerns expressed for F/A-18C/D survivability.

Billions of fasteners are used in safety-critical applications such as buildings, nuclear power plants, bridges, motor vehicles, airplanes, and other products or equipment each year. For example, an automobile may have as many as 3,000 fasteners. In 1988, the House Committee on Energy and Commerce's Subcommittee on Oversight and Investigations issued a report on counterfeit and substandard fasteners that, along with hearings held by the House Science Committee, led to the enactment of FQA on November 16, 1990. The subcommittee reported that failures of substandard and often counterfeit fasteners may have been responsible for deaths and injuries, reduced defense readiness, and that they potentially threatened the safety of every American. According to the subcommittee report, the Defense Industrial Supply Center, which supplies fasteners to the armed services, found that its inventory contained over 30 million counterfeit fasteners and that Army depots contained another 2.6 million. Similarly, the National Aeronautics and Space Administration (NASA) reported that it found substandard fasteners in space shuttle equipment, and six of its fastener vendors were found to have inadequate quality-control systems. The Air Force likewise discovered substandard flight safety-critical aerospace fasteners in its inventory. FQA covers certain threaded, metallic, heat-treated fasteners of one- quarter inch diameter or greater for use in safety-critical applications. As originally enacted in 1990, FQA required manufacturers and importers to submit all lots of fasteners with significant safety applications to accredited laboratories for testing; established a laboratory accreditation program at the Commerce Department's National Institute of Standards and Technology (NIST); required original test certificates to accompany the fasteners throughout the sale process; established requirements for manufacturers' insignias to ensure traceability of fasteners to manufacturers and distributors; and provided for civil and criminal penalties for violations of the act. Since its passage, FQA has been amended several times. Concerns over the regulatory burden of FQA on aviation manufacturers led Congress, in August 1998, to amend the act to exempt certain fasteners approved by the Federal Aviation Administration for use in aircraft. The 1998 amendments also delayed implementation of NIST's regulations for accrediting testing laboratories. FQA was amended again on June 8, 1999,to make it less burdensome: Fasteners that are part of an assembly or that are ordered for use as a spare, substitute, service, or replacement part in a package containing 75 or fewer parts at the time of sale or are contained in an assembly kit (i.e., the small-lot exemption) were exempted from coverage. Fasteners manufactured in a facility using quality-assurance systems were exempted from coverage. The amendment required accredited laboratory testing only of fasteners manufactured to consensus standards requiring testing, and postponed that requirement until June 2001. Companies were allowed to transmit and store electronically all records on fastener quality provided that reasonable means of authentication of the source of the document existed. The Commerce Department was required to establish and maintain a hotline for reporting alleged violations of the law. All credible allegations would then be forwarded to the Attorney General. The amendment also made it unlawful to knowingly misrepresent or falsify the fastener's record of conformance or identification, characteristics, properties, mechanical or performance marks, chemistry, or strength. Although FQA does not mention Customs, Customs is authorized by 15 U.S.C. SS 1125(b) to identify and detain imported goods marked or labeled with a false description or representation. Under this authority, Customs has conducted spot checks of imported fasteners since 1987 to determine if fasteners' descriptions or representations are accurate. It has seven laboratories located around the country that provide scientific support to all Customs officers, other government agencies, and foreign governments as part of international assistance programs. Customs laboratories tested samples from randomly selected shipments of graded boltsimported from January through April 1998 in various sized lots and again in March and April 2001. These included one or more of the following tests: carbon, sulfur, phosphorous, alloying elements (chemical tests); or tensile strength and hardness (mechanical tests). Customs' Chicago laboratory tested 66 randomly selected shipments of graded bolts (12 in small lots) imported during March and April 2001 and found that none were substandard. As discussed below, this is a decrease from results of tests that Customs did before December 1999. Customs' laboratories also tested a random sample of 77 shipments of graded bolts imported in various sized lots from January 12 to April 12, 1998, and found three (not in small lots) to be substandard. The bolts failed either the tensile or hardness test and were imported through Chicago from Korea or Taiwan. On the basis of these sample results, the Customs study estimated that 5 percent of the 3,097 shipments of the same type of bolts that entered U.S. ports during the 3-month test period were substandard. In addition to testing graded fasteners imported in March and April 2001, Customs' Chicago laboratory tested, at our request, samples of graded bolts from 15 small lotsthat DSCP had purchased between January 1998 and February 2001, and found that none were defective. Three lots were from contracts for purchases after December 1999and the remainder were before this time. According to a DSCP official, there is no way to determine if the contractors used foreign or domestic materials. Because of the small number of lots tested, the results, by themselves, cannot be used to make any conclusions about industry changes in manufacturing small lots. These results are, however, the best data available on fasteners that DSCP purchased in small lots. None of the 14 responses to our Federal Register notice stated that the fastener industry had changed any practices as a result of the small-lot exemption, as shown in the examples below. The Industrial Fasteners Institute and the National Fastener Distributors Association said they believe that there will be no evidence of significant changes in industry practice because most fasteners sold under the small- lot exemption are produced under quality-assurance systems and are therefore not subject to the act. They further stated that since fastener manufacturers can comply with the test requirements in the amended act in a cost-efficient manner, it is doubtful that industry members would attempt to avoid these costs by marketing fasteners in small-lot packages. The Canadian Fasteners Institute said that in the last decade, the fastener industry has made great advances and investments in product quality control and assurance. It said that the concern with the small-lot exemption stems from its potential for creating a public safety hazard and that the opportunity for the emergence of substandard products in commerce is too great a risk with the small-lot exemption in place. It suggested that, in lieu of any exemptions, FQA be amended to say that the manufacturer, distributor, or importer that sells fasteners as having certain mechanical and physical properties must be capable of substantiating those properties. That is, promises a seller makes to a buyer must be verifiable with objective evidence. The Alliance of Automobile Manufacturers and the Association of International Automobile Manufacturers (AIAM) said that their members produce virtually all the passenger cars and light trucks sold in the United States and use 300 billion fasteners annually. They reported that Congress exempted most automotive fasteners from FQA because strong incentives exist to enhance fastener quality, given the potential impact of faulty fasteners on customer satisfaction, product liability, and regulatory liability. They said that manufacturers have developed various measures, as follows, to assure the quality of the fasteners that they purchase: Proprietary standards--Vehicle manufacturers have developed their own fastener standards to assure that their fasteners are appropriate for specific applications. Quality-assurance systems--Vehicle manufacturers generally require that their fastener suppliers be certified under fastener quality-assurance systems to minimize the occurrence of nonconforming fasteners. Closed-loop acquisition--Vehicle manufacturers generally purchase their fasteners from approved suppliers to assure quality and accountability, and rarely purchase generic fasteners on the open market. The Alliance and AIAM said that they surveyed their members to obtain responses to the questions contained in our Federal Register notice. They said that the responses they received represented over 90 percent of U.S. light vehicle sales in calendar year 1999. None of the respondents reported any significant changes in procurement and packaging practices that involved a reduction in units per package to below 75 units, or an increase in the use of assembly kits as a means of complying with the FQA requirements through the small-lot exemption. The Alliance and AIAM said that on the basis of these survey results, virtually all of the fasteners produced to assemble or service members' products are either manufactured to internal company proprietary standards or are produced under a qualifying fastener quality-assurance system, or both. As a result, they said much less than 1 percent of fasteners purchased are exempt from FQA solely through the small-lot exemption. These groups reported that the small-lot exemption still serves a very important purpose: to allow the continued availability, at an affordable price, of many spare-part fasteners required to service their members' products in a safe manner. The majority of these small package/assembly kit fasteners are used to service older models that typically have very low annual sales of spare parts. Without this vital exemption, they report, the costs of such parts would become prohibitive, forcing their members to remove many of these products from the market. In such a case, they believe, the customer desiring to service his or her car would typically be forced to substitute the correct-specification fastener with a generic hardware store look-alike fastener, one that in all likelihood was manufactured to different specifications and uncertain quality standards. The Equipment Manufacturers Institute, an association of companies that manufacture agricultural, construction, forestry, materials-handling, and utility equipment, reported that its members want the small-lot exemption to remain in law. They are concerned that altering or removing it could result in burdensome paperwork and wasteful and unnecessary quality tests for fasteners that are commonly used for the off-road equipment industry. They said this would result in large nonvalue-added costs that would ultimately be borne by the consumer and reduce America's global competitiveness and cost jobs. Additionally, they stated, fastener quality has not been a problem for its industry, and remains that way today. Other comments received included the following: The director of quality assurance at Huck Fasteners, Inc., said that he had surveyed his eight manufacturing facilities and found no changes in how fasteners are packaged as a result of FQA. A fastener manufacturer's representative said that he had not seen any changes in industry practices as a result of the small-lot exemption, and that all the manufacturers and distributors he knows are in compliance. The president of Edward W. Daniel Co., a manufacturer of industrial lifting hardware and a member of the National Fastener Distributors Association, said that most manufacturers/importers of fasteners have developed quality programs and maintain the appropriate records for tracing the manufacturing materials used. None of the officials that we spoke with in DSCP or NASA reported any evidence of changes in fastener industry practices resulting from, or apparently resulting from, the small-lot exemption. DSCP officials reported that their agency requires prospective suppliers of fasteners to have a quality-assurance system. Likewise, officials from the Departments of Commerce and Justice, agencies that have specific responsibilities under FQA, stated that they did not have any evidence of changes in fastener industry practices. DSCP did not report any changes in industry practices. It operates a program that requires both manufacturers and distributors who want to sell to it to be prequalified. According to the agency Web site, applicants for the program must demonstrate their controls and established criteria to provide maximum assurance that the products procured conform to specifications. In addition, DSCP tests certain product lines, such as aerospace products, and randomly selects products for testing on a regular basis from its inventory. DSCP officials said that they manage approximately 1.2 million items, of which about 300,000 are fastener products and about 10 percent are covered under FQA. None of NASA's nine centersreported any changes in industry practices as a result of the small-lot exemption. NIST officials responsible for FQA said that, as of March 31, 2001, they have not received any reports that the fastener industry has changed any practices as a result of the small-lot exemption. Similarly, officials from the Bureau of Export Administration reported that, as of March 30, 2001, their fraud hotline, which became operational on June 27, 2000, had not received any allegations that relate to the small-lot exemption. Officials at the Department of Justice said that the 1999 amendments to FQA were so new that neither its criminal nor civil divisions had any activity involving fasteners. Additionally, they said, they were not aware of any prosecutions or convictions involving fasteners sold in packages of 75 or fewer or in assembly kits since December 1999. We found no evidence that the fastener industry has changed any practices resulting from, or apparently resulting from, the small-lot exemption. We provided a draft of this report to the Secretary of Commerce, the Secretary of Treasury, and the Secretary of Defense for review and comment. In a June 4, 2001, letter, the Secretary of Commerce stated that the relevant bureaus of the Department of Commerce had reviewed the report and had no substantive comments (see app. III). Other Commerce staff provided technical comments on the draft report, which we incorporated as appropriate. In a May 23, 2001, memorandum, the Director, Office of Planning, U.S. Customs Service stated that he had no substantive comments to make (see app. IV). Other U.S. Customs staff provided technical comments on the draft report, which we also incorporated as appropriate. The Department of Defense provided comments, concurring in the report's findings and providing technical comments on the draft report, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Commerce; the Secretary of the Treasury; the Secretary of Defense; and the Administrator, National Aeronautics and Space Administration. Copies will also be available at our Web site at www.gao.gov. Should you have any questions on matters contained in this report, please contact me at (202) 512-6240 or Alan Stapleton, Assistant Director, at (202) 512-3418. We can also be reached by e-mail at [email protected] or [email protected], respectively. Other key contributors to this report included David Plocher and Theresa Roberson. As stated in FQA, our objective was to determine if there had been any changes in fastener industry practice "resulting from or apparently resulting from" the small-lot exemption in FQA. To achieve this objective, we compared the results of Customs' mechanical and chemical tests of bolts imported during March and April 2001 with the results of similar testing performed by Customs for bolts imported from January through April 1998. These tests had several limitations. According to Customs officials, the document that an importer provides for each shipment of fasteners does not have to identify that the shipment contains packages of 75 or fewer fasteners (i.e., small lots) or that the fasteners are of a particular grade. Therefore, for both the 1998 and 2001 tests, Customs could not randomly select just those shipments containing small lots of grade 5 and grade 8 fasteners. Rather, the selection also included ungraded fasteners that were not sent to the laboratory for testing because, without the grade marking, Customs could not identify the test standards. For the 2001 test, Customs recorded when the package selected contained 75 or fewer graded bolts so we could compare their test results with those for packages containing more than 75 bolts. We observed Customs' inspection of imported fasteners at Chicago's O'Hare International Airport; we also visited Customs' Chicago laboratory and observed its testing of some of the selected fasteners. Another limitation was that Customs designed both its 1998 and 2001 studies to only randomly select shipments valued at $2,500 or more so that resources were not spent on small, inconsequential shipments. However, problems during the 1998 study caused over 28 percent of the shipments selected to be valued at less than $2,500. These included 80 shipments valued at less than $500 and at least one valued at $1. Based on the price of grade 5 and grade 8 bolts, it is likely that some of the 80 shipments valued at less than $500 included in the 1998 test were in small lots. To address our objective, we also compared the results of Customs' mechanical and chemical tests of fasteners DSCP purchased in small lots from January 1998 to December 1999 with the results of Customs' mechanical and chemical tests of fasteners DSCP purchased from January 2000 to January 2001. We selected DSCP because of its problems in the 1980s with counterfeit fasteners. We asked DSCP to send the samples directly to Customs for testing. There were limitations in DSCP's selection of the samples. DSCP officials initially identified 56 different contracts for small-lot purchases for potential testing, yet only 15 lots were ultimately tested. DSCP officials decided that 15 of the 56 contracts were ineligible for testing because the lot size was fewer than 25 bolts; thus, taking several bolts for testing could result in DSCP's not being able to fill a customer's order. Officials further said that 25 small-lot purchases were not tested because no inventory remained at the time the depots were asked to ship the bolts to Customs' laboratory. Finally, one sample sent to Customs for testing was not traceable to a contract number, and so it was eliminated from the test results. To give the public an opportunity to report any changes in industry practices, we published a notice in the Federal Register on August 9, 2000 (F.R. 48714), and on our Web site, asking for comments no later than November 30, 2000. We also notified nearly 60 journals, newsletters, associations, and manufacturers of our Federal Register notice. As a result, several journals (e.g., Fastener Industry News and Wire Journal International) wrote articles about our study that often referred readers who wanted more information to our Federal Register notice or Web site. We also asked associations representing the fastener industry and the automobile industry to notify their memberships about our Federal Register notice and Web site notice. We asked officials at agencies that had experienced problems with fasteners in the past (DSCP and NASA) and NIST (with responsibilities under FQA) if they were aware of any changes in industry practices resulting from, or apparently resulting from, the FQA small-lot exemption. In addition, we asked officials at Commerce's Bureau of Export Administration whether they had received any FQA allegations involving small lots of fasteners and officials in the Department of Justice about any allegations, investigations, prosecutions, or convictions involving fasteners sold in small lots or in assembly kits. We also attempted to compare the results of NASA's tests of grade 8 fasteners purchased by its Langley Research Center before and after December 1999. However, there were too few mechanical and chemical tests completed to make this comparison possible. We conducted our review from January 2000 to May 2001, in accordance with generally accepted government auditing standards. We performed our work in Washington D.C., and Chicago, Illinois.

This report reviews changes in fastener industry practice "resulting from or apparently resulting from" the small-lot exemption of the Fastener Quality Act. GAO found no evidence that the fastener industry changed any practices resulting from, or apparently resulting from, the small-lot exemption. The Customs Service's limited tests of imported fasteners in 2001 found no evidence of substandard fasteners and no evidence of any decline in the quality of fasteners from the results of tests Customs conducted in 1998.

The DRC is a vast, mineral-rich nation with an estimated population of about 75 million people and an area that is roughly one-quarter the size of the United States. Since its independence in 1960, the DRC has undergone political upheavals, including a civil war. Eastern DRC, in particular, has continued to be plagued by violence, including sexual violence against women and children, perpetrated by armed groups and some members of the Congolese national military. Some of the adjoining countries in the region have also experienced recent turmoil, which has led to flows of large numbers of refugees and internally displaced persons into the DRC. For example, the United Nations High Commissioner for Refugees (UNHCR) estimated that as of mid-2013 there were around 2.6 million internally displaced persons living in camps or with host families in the DRC. Various industries, particularly manufacturing industries, use the four conflict minerals in a wide variety of products. For example, tin is used to solder metal pieces and is also found in food packaging, in steel coatings on automobile parts, and in some plastics. Most tantalum is used to manufacture tantalum capacitors, which enable energy storage in electronic products such as cell phones and computers, and to produce alloy additives, which can be found in turbines in jet engines. Tungsten is used in automobile manufacturing, drill bits and cutting tools, and other industrial manufacturing tools and is the primary component of filaments in light bulbs. Gold is used as a reserve and in jewelry and is used by the electronics industry. As we have previously reported, conflict minerals are mined in various locations around the world. Over the past decade, Congress has focused on issues related to the DRC. In 2006, Congress passed the Democratic Republic of the Congo Relief, Security, and Democracy Promotion Act of 2006, stating that U.S. policy is to engage with governments working for peace and security throughout the DRC and holding accountable any individuals, entities, and countries working to destabilize the country. In 2011, State and USAID developed the U.S. Strategy to Address the Linkages between Human Rights Abuses, Armed Groups, Mining of Conflict Minerals and Commercial Products (the strategy). The SEC conflict minerals disclosure rule outlines a three-step process for companies to follow, as applicable, to comply with the rule. Broadly, the process falls into three steps requiring a company to (1) determine whether the rule applies to it; (2) conduct a reasonable country of origin inquiry (RCOI) concerning the origin of conflict minerals used; and (3) exercise due diligence, if appropriate, to determine the source and chain of custody of conflict minerals used. (App. II depicts SEC's flowchart summary of the rule). Of the 1,321 companies that filed conflict minerals disclosures in 2014, the sample of filings that we reviewed indicates that almost all of the companies conducted an RCOI and a majority of them exercised due diligence, but most reported that they were unable to determine the country of origin of conflict minerals they had used in 2013. Company representatives we interviewed cited difficulties in obtaining information from suppliers. According to our analysis, an estimated 67 percent reported that they were unable to determine the 4 percent reported that conflict minerals came from Covered 24 percent reported that conflict minerals did not originate in 2 percent reported that conflict minerals came from scrap or 3 percent did not provide a clear determination. According to our estimate, just about all of the companies that filed conflict minerals disclosures reported that they conducted an RCOI, with 96 percent of them reporting that they conducted a survey of their suppliers to try to obtain information about whether they used conflict minerals, the country of origin of those conflict minerals, and the processor of the conflict minerals. Based on some of the filings that we reviewed and interviews with company representatives, in general, companies used a supplier survey and industry template to conduct their RCOIs. A challenge noted by representatives of some companies we spoke with was that they received incomplete information from suppliers, limiting their ability to determine the source and chain of custody of the conflict minerals they used in 2013. We should note that in a July 2013 report, we found that a company's supply chain can involve multiple tiers of suppliers. As a result, a request for information from a company could go through many suppliers, as figure 1 illustrates, delaying the communication of information to the company. For example, as we noted in our 2013 report, companies required to report under the rule could submit the inquiries to their first-tier suppliers. Those suppliers could either provide the reporting company with sufficient information or initiate the inquiry process up the supply chain, such as by distributing the inquiries to suppliers at the next tier-- tier 2 suppliers. The tier 2 suppliers could inquire up the supply chain to additional suppliers, until the inquiries arrived at the smelter. Smelters could then provide the suppliers with information about the origin of the conflict minerals. Representatives of some companies that we spoke with told us that they were making efforts to address concerns about the lack of information on the country of origin of conflict minerals they had used. Our analysis shows that the exercise of due diligence on the source and chain of custody of conflict minerals yielded little or no additional information, beyond the RCOI, regarding the country of origin of conflict minerals or whether the conflict minerals that companies used in 2013 in their products benefited or financed armed groups in the Covered Countries. The estimated 4 percent of the companies who determined that the necessary conflict minerals used in their products originated from Covered Countries could not determine whether such conflict minerals financed or benefitted armed groups during the reporting period, even though they disclosed that they conducted due diligence on the source and chain of custody of conflict minerals they used. State and USAID officials reported that they are implementing the U.S. conflict minerals strategy they submitted to Congress in 2011 through specific actions that address the strategy's five key objectives. Both State and USAID officials in Washington and the region reiterated that the strategy and its five key objectives remain relevant. The following summarizes our findings about each objective: Promote an Appropriate Role for Security Forces (Objective 1). Some of the reported actions being undertaken by the International Organization for Migration (IOM), a USAID implementing partner, are helping to lessen the involvement of the military and increasing the role of legitimate DRC government stakeholders in mining areas. For example, USAID reported that IOM has assisted with the planning and demilitarization of mine sites in eastern DRC through leading a multi-sector stakeholder process of mine validation to ensure that armed groups and criminal elements of the Congolese military are not active in eastern DRC mines. As we previously reported, according to UN, U.S., and foreign officials and NGO representatives, some members of the Congolese national military units are consistently and directly involved in human rights abuses against the civilian population in eastern DRC and are involved in the exploitation of conflict minerals and other trades. Enhance Civilian Regulation of the DRC Minerals Trade (Objective 2). USAID reported that it is undertaking a number of actions, through implementing partners, to enhance civilian regulation and traceability of the DRC minerals trade. For example, USAID reported funding TetraTech, a technical services company, to (1) build the capacity for responsible minerals trade in the DRC, (2) strengthen the capacity of key actors in the conflict minerals supply chain, and (3) advance artisanal and mining rights. In addition, USAID indicated that it is funding IOM to support DRC infrastructure and regulatory reform. According to an IOM official we spoke with in the region, IOM also provides the DRC government with information on which mines should be suspended from the conflict-free supply chain based on safety and human rights violations. During our visit to the region, we met with a USAID official and representatives of local human rights organizations who told us that the implementation of traceability schemes is contributing to positive outcomes. For example, in some cases, according to USAID, local miners earn double the price for certified conflict-free minerals compared to non-certified illegal minerals, which is more than they would earn from smuggling (see app. III, figs. 1 and 2). Protect Artisanal Miners and Local Communities (Objective 3). State and USAID reported several programs through their implementing partners, aimed at protecting artisanal miners and local communities and providing alternative livelihoods. For example, State reported that it funded an implementing partner for anti-human-trafficking initiatives as well as to promote alternative livelihoods and improve workers' rights in the artisanal mining sector. According to State, these efforts aimed to reduce the vulnerability of men and women in local communities. In addition, USAID has funded an implementing partner to promote community conflict mitigation and conflict minerals monitoring structures at local levels. According to USAID, artisanal mining provides survival incomes to Congolese throughout the country but it is particularly significant in eastern DRC, where roughly 500,000 people directly depend on artisanal mining for their income. These miners work under very difficult safety, health, and security conditions and almost always within an illicit environment. Moreover, as we observed during our visits to the mines in the region, artisanal mining is a physically demanding activity requiring the use of rudimentary techniques and little or no industrial capacity (see app. III, figs. 3 and 4). Strengthening Regional and International Efforts (Objective 4). U.S. diplomatic and capacity building initiatives have reportedly helped strengthen international efforts. For example, USAID said it is working with TetraTech to build the capacity of the International Conference on the Great Lakes Region (ICLGR), an intergovernmental organization. According to USAID, this effort supports the implementation and coordination of regional countries' efforts to promote monitoring, certification, and traceability of mine sites. A TetraTech representative we met with in the region told us that TetraTech is also organizing workshops for educating and raising awareness about regional certification in ICGLR countries. According to officials we interviewed from the United Nations Organization Stabilization Mission in the Democratic Republic of the Congo (MONUSCO) and the ICGLR, as well as local officials, U.S. diplomacy has increased awareness about conflict minerals and improved coordination in the region. Some of these officials described State and USAID actions to strengthen regional and international efforts as the most effective in the region. Promote Due Diligence and Responsible Trade through Public Outreach (Objective 5). State and USAID reported engaging in various efforts to reach out to industry associations, NGOs, international organizations, and regional entities to help promote due diligence and responsible trade in conflict minerals. For example, State and USAID reported that they leveraged private sector interest to establish the Public-Private Alliance for Responsible Minerals Trade to support supply chain solutions to conflict minerals challenges in the region. The alliance includes State, USAID, and representatives from U.S. end-user companies, industry associations, NGOs, and ICGLR, among others. In addition, State is engaged with the Conflict-Free Sourcing Initiative (CFSI) and State and USAID both participate in the biannual Organization for Economic Co-operation and Development, UN Group of Experts (UNGOE), and ICGLR forums. According to State and USAID officials, these efforts promote continued engagement with industry officials and civil society groups and encourage due diligence and strengthening of conflict-free supply chains. A USAID official in the region told us that teams of private sector executives, hosted by State and USAID officials, have visited eastern DRC and Rwanda mining sites on several occasions, reinforcing the executives' commitment to source minerals responsibly. In addition, a State official noted that some private companies have been active in providing feedback on certification and traceability mechanisms. Although State and USAID officials provided some examples of results associated with their actions, the agencies face difficult operating conditions that complicate efforts to address the connection between human rights abuses, armed groups, and the mining of conflict minerals. We have described some of these challenges in our previous reports but, as we observed during our fall 2014 visit to the region, numerous challenges continue to exist. First, the mining areas in eastern DRC continue to be plagued by insecurity because of the presence and activities of illegal armed groups and some corrupt members of the national military. In 2010, we reported extensively on the presence of illegal armed groups, such as the Democratic Forces for the Liberation of Rwanda or Forces Democratiques de Liberation du Ruwanda, and some members of the Congolese military and the various ways in which they were involved in the exploitation of the conflict minerals sector in eastern DRC. In 2013, the Peace and Security Cooperation Framework signed by 11 regional countries noted that eastern DRC has continued to suffer from recurring cycles of conflict and persistent violence. Although U.S. agency and Congolese officials informed us during our recent fieldwork in the region that a large number of mines had become free of armed groups (referred to as green mines), MONUSCO officials we met with in the DRC also told us that armed groups and some members of the Congolese military were still active in other mining areas. Specifically, MONUSCO officials described two fundamental ways in which armed groups continued to be involved in conflict minerals activities: directly, by threatening and perpetrating violence against miners to confiscate minerals from them; and indirectly, by setting up checkpoints on trade routes to illegally tax miners and traders. As we noted in our 2010 report, U.S. agency and UN officials and others believe that the minerals trade in the DRC cannot be effectively monitored, regulated, or controlled as long as armed groups and some members of the Congolese national military continue to commit human rights violations and exploit the local population at will. As we reported in 2010, U.S. government officials and others indicated that weak governance and lack of state authority in eastern DRC constitute a significant challenge. As we noted then, according to UN officials, if Congolese military units are withdrawn from mine sites, civilian DRC officials will need to monitor, regulate, and control the minerals trade. We also noted that effective oversight of the minerals sector would not occur if civilian officials in eastern DRC continued to be underpaid or not paid at all, as such conditions easily lead to corruption and lack of necessary skills to perform their duties. Evidence shows that this situation has not changed much. U.S. agencies and an implementing partner, as well as some Congolese officials, told us that there are not enough trained civilians to effectively monitor and take control of the mining sector. ICGLR officials we met with highlighted the importance of a regional approach to addressing conflict minerals and indicated that governments' capacity for and interest in participating in regional certification schemes varies substantially, making it difficult to implement credible, common standards. Corruption continues to be a challenge in the mining sector. For example, a member of the UN Group of Experts told us that smuggling remains prolific and that instances of fraud call into question the integrity of traceability mechanisms. This official stated that tags used to certify minerals as conflict-free are easily obtained and sometimes sold illegally in the black market. According to USAID officials, USAID is working to introduce a pilot traceability system to increase transparency, accountability, and competition in the legal artisanal mining sector. According to U.S. government officials and officials from local and civil society in the region that we met with, lack of state authority bolsters armed group activity and precludes public trust in the government. Poor infrastructure, including poorly maintained or nonexistent roads, makes it difficult for mining police and other authorities to travel in the region and monitor mines for illegal armed group activity. In our 2010 report, we reported that the minerals trade cannot be effectively monitored, regulated, and controlled unless civilian DRC officials, representatives from international organizations, and others can readily access mining sites to check on the enforcement of laws and regulations and to ensure visibility and transparency at the sites. As shown by the photograph in app. III, fig. 5, during our recent visit to the region, poor road conditions made travel to the mines very challenging. Chairman Huizenga, Ranking Member Moore, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact Kimberly Gianopoulos, Director, International Affairs and Trade, at (202) 512-8612 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 Godwin Agbara (Assistant Director), Marc Castellano (Analyst-in-Charge), Jeffrey Baldwin-Bott, Debbie Chung, Stephanie Heiken, Andrew Kurtzman, Grace Lui, and Jasmine Senior. SEC Conflict Minerals Rule: Initial Disclosures Indicate Most Companies Were Unable to Determine the Source of Their Conflict Minerals. GAO-15-561. Washington, D.C.: August 18, 2015. Conflict Minerals: Stakeholder Options for Responsible Sourcing Are Expanding, but More Information on Smelters Is Needed. GAO-14-575. Washington, D.C.: June 26, 2014. SEC Conflict Minerals Rule: Information on Responsible Sourcing and Companies Affected, GAO-13-689. Washington D.C.: July 18, 2013. Conflict Minerals Disclosure Rule: SEC's Actions and Stakeholder- Developed Initiatives. GAO-12-763. Washington, D.C.: July 16, 2012. The Democratic Republic of Congo: Information on the Rate of Sexual Violence in War-Torn Eastern DRC and Adjoining Countries. GAO-11-702. Washington, D.C.: July 13, 2011. The Democratic Republic of the Congo: U.S. Agencies Should Take Further Action to Contribute to the Effective Regulation and Control of the Minerals Trade in Eastern Democratic Republic of the Congo. GAO-10-1030. Washington, D.C.: September 30, 2010. We took the following photographs in the Democratic Republic of the Congo, Burundi, and Rwanda during fieldwork for our August 2015 report.

This testimony summarizes the information contained in GAO's August 2015 report, entitled SEC Conflict Minerals Rule: Initial Disclosures Indicate Most Companies Were Unable to Determine the Source of Their Conflict Minerals , (GAO-15-561) . According to a generalizable sample GAO reviewed, company disclosures filed with the Securities and Exchange Commission (SEC) for the first time in 2014 in response to the SEC conflict minerals disclosure rule indicated that most companies were unable to determine the source of their conflict minerals. Companies that filed disclosures used one or more of the four "conflict minerals"--tantalum, tin, tungsten, and gold--determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo (DRC) or adjoining countries. Most companies were based in the United States (87 percent). Almost all of the companies (99 percent) reported performing country-of-origin inquiries for conflict minerals used. Companies GAO spoke to cited difficulty obtaining necessary information from suppliers because of delays and other challenges in communication. Most of the companies (94 percent) reported exercising due diligence on the source and chain of custody of conflict minerals used. However, most (67 percent) were unable to determine whether those minerals came from the DRC or adjoining countries (Covered Countries), and none could determine whether the minerals financed or benefited armed groups in those countries. Companies that disclosed that conflict minerals in their products came from covered countries (4 percent) indicated that they are or will be taking action to address the risks associated with the use and source of conflict minerals in their supply chains. For example, one company indicated that it would notify suppliers that it intends to cease doing business with suppliers who continue to source conflict minerals from smelters that are not certified as conflict-free. a Covered Countries: Angola, Burundi, Central African Republic, the Democratic Republic of the Congo, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia. Department of State (State) and U.S. Agency for International Development (USAID) officials reported taking actions to implement the U.S. conflict minerals strategy, but a difficult operating environment complicates this implementation. The agencies reported supporting a range of initiatives including validation of conflict-free mine sites and strengthening traceability mechanisms that minimize the risk that minerals that have been exploited by illegal armed groups will enter the supply chain. As a result, according to the agencies, 140 mine sites have been validated and competition within conflict-free traceability systems has benefited artisanal miners and exporters. Implementation of the U.S conflict minerals strategy faces multiple obstacles outside the control of the U.S. government. For example, eastern DRC is plagued by insecurity because of the presence of illegal armed groups and some corrupt members of the national military, weak governance, and poor infrastructure.

The draft proposed "Working for America Act" is intended to ensure that agencies are equipped to better manage, develop, and reward employees to better serve the American people. Its purpose is to establish a federal human capital system under which employees have clear performance goals and opportunities for professional growth; managers who help them succeed; and pay increases based on performance rather than the passage of time. In addition, any new flexibilities are to be exercised in accordance with the merit system principles; related core values; and protections, such as against discrimination, political influence, and personal favoritism, of the civil service. Today I will provide observations on three central areas of the draft proposal as we understand it: pay and performance management; OPM's new responsibilities to implement the proposed pay reform; and labor management relations and adverse actions and appeals. As I stated earlier, GAO strongly supports the need to expand pay reform in the federal government and believes that implementing more market-based and performance-oriented pay systems is both doable and desirable. The federal government's current pay system is weighted toward rewarding length of service rather than individual performance and contributions; automatically providing across-the-board annual pay increases, even to poor performers. It also compensates employees living in various localities without adequately considering the local labor market rates applicable to the diverse types of occupations in the area. Importantly, the draft proposal, as we understand it, incorporates many of the key practices of more market-based and performance-oriented pay systems and requires that OPM certify that each agency's pay for performance system meet prescribed criteria. Going forward, OPM should define in regulation what fact-based and data-driven analyses agencies will need to provide to OPM to receive certification. Clearly, a competitive compensation system can help organizations attract and retain a quality workforce. To begin to develop such a system, organizations assess the skills and knowledge they need; compare compensation against other public, private, or nonprofit entities competing for the same talent in a given locality; and classify positions along various levels of responsibility. In addition, organizations generally structure their competitive compensation systems to separate base salary from bonuses and other incentives and awards. Under the draft proposal, OPM is to design a new core classification and pay system and agencies, in coordination with OPM, are to establish performance appraisal systems to promote high performance. Specifically, the General Schedule is to be repealed and to replace it, OPM is to establish pay bands for occupational groups based on factors such as mission, competencies, or relevant labor market features. For each pay band, OPM is to establish ranges of basic pay rates that apply in all locations. There are to be market-oriented pay adjustments. The governmentwide national market adjustment is to vary by occupational group and band with the flexibility to make additional local market adjustments. Going forward, more information is needed on what compensation studies are to be conducted in setting these market-based pay rates. Effective performance management systems can be a vital tool for aligning the organization with desired results and creating a "line of sight" showing how team, unit, and individual performance can contribute to overall organizational results. Such systems work to achieve three key objectives: (1) they strive to provide candid and constructive feedback to help individuals maximize their contribution and potential in understanding and realizing the goals and objectives of the organization, (2) they seek to provide management with the objective and fact-based information it needs to reward top performers, and (3) they provide the necessary information and documentation to deal with poor performers. The draft proposal incorporates many of the key practices that we have reported have helped agencies implement effective performance management systems. These practices include: Linking Organizational Goals to Individual Performance. Under the draft proposal, agencies are to set performance expectations that support and align with the agencies' mission and strategic goals, organizational program and policy objectives, annual performance plans, results, and other measures of performance. Further, agencies are to communicate the performance expectations in writing at the beginning of the appraisal period. Making Meaningful Distinctions in Performance. Supervisors and managers are to be held accountable for making meaningful distinctions among employees based on performance, fostering and rewarding excellent performance, and addressing poor performance, among other things. Agencies are not to impose a forced distribution of performance ratings in terms of fixed numeric or percentage limitations on any summary rating levels. Performance appraisal systems are to include at least two summary rating levels, essentially a "pass/fail" system, for employees in an "Entry/Developmental" band and at least three summary rating levels for other employee groups. Pass/fail systems by definition will not provide meaningful distinctions in performance ratings. In addition, while a three-level system might be workable, using four or five summary rating levels is preferable since it naturally allows for greater performance rating and pay differentiation. Moreover, this approach is consistent with the new governmentwide performance-based pay system for the members of the Senior Executive Service (SES), which requires agencies to use at least four summary rating levels to provide a clear and direct link between SES performance and pay as well as to make meaningful distinctions based on relative performance. Cascading this approach to other levels of employees can help agencies recognize and reward employee contributions and achieve the highest levels of individual performance. Linking Pay to Performance. Employees must receive at least a "fully successful" rating to receive any pay increase. Those employees who receive less than a fully successful rating are not to receive an increase, including the national and local market adjustments discussed above. Performance pay increases for employees are to be allocated by the "performance shares" of a pay pool. Agencies are to determine the value of one performance share, expressed as a percentage of the employee's basic pay or as a fixed dollar amount. There are to be a set number of performance shares for each pay pool so that the employees with higher performance ratings are to receive a greater number of shares and thus, a greater payout. At the agency's discretion, any portion of the employee's performance pay increase not converted to a basic pay increase may be paid out as a lump-sum payment. Providing Adequate Safeguards to Ensure Fairness and Guard Against Abuse. Agencies are to incorporate effective safeguards to ensure that the management of systems is fair and equitable and based on employee performance in order to receive certification of their pay for performance systems. We have found that a common concern that employees express about any pay for performance system is whether their supervisors have the ability and willingness to assess employees' performance fairly. Using safeguards, such as having independent reasonableness reviews of performance management decisions before such decisions are final, can help to allay these concerns and build a fair and credible system. This has been our approach at GAO and we have found it works extremely well. In addition, agencies need to assure reasonable transparency and provide appropriate accountability mechanisms in connection with the results of the performance management process. This can include publishing internally the overall results of performance management and individual pay decisions while protecting individual confidentiality. For example, we found that several of OPM's demonstration projects publish information for employees on internal Web sites that include the overall results of performance appraisal and pay decisions, such as the average performance rating, the average pay increase, and the average award for the organization and for each individual unit. GAO is also publishing aggregate data for all of our pay, promotion, and other important agency-wide human capital actions. As I noted, before implementing any human capital reforms, executive branch agencies should follow a phased approach that meets a "show me" test. That is, each agency should be authorized to implement a reform only after it has shown it has met certain requirements, including an assessment of its institutional infrastructure and an independent certification by OPM of the existence of this infrastructure. This institutional infrastructure includes (1) a strategic human capital planning process linked to the agency's overall strategic plan; (2) capabilities to design and implement a new human capital system effectively; (3) a modern, effective, credible, and validated performance management system that provides a clear linkage between institutional, unit, and individual performance-oriented outcomes, and results in meaningful distinctions in ratings; and (4) adequate internal and external safeguards to ensure the fair, effective, and nondiscriminatory implementation of the system. A positive feature of the draft proposal is that agencies are to show that their pay for performance systems have met prescribed criteria in order to receive certification from OPM to implement their new systems. Among these criteria are having the means for ensuring employee involvement in the design and implementation of the pay for performance system; adequate training and retraining for supervisors, managers, and employees in the implementation and operation of the pay for performance system; a process for ensuring periodic performance feedback and dialogue between supervisors, managers, and employees throughout the appraisal period; and the means for ensuring that adequate agency resources are allocated for the design, implementation, and administration of the pay for performance system. Further, OPM may review an agency's pay for performance systems periodically to assess whether they continue to meet the certification criteria. If they do not, OPM may rescind the agency's certification and direct the agency to take actions to implement an appropriate system, which the agency must follow. Going forward, I believe that OPM should define in regulation what it will take in terms of fact-based and data-driven analyses for agencies to demonstrate that they are ready to receive this certification. Clearly, the President's Management Agenda, and its standards for the strategic management of human capital, can inform the certification process. Also, as an example of the analyses that have been required, OPM has outlined in regulations for the SES performance-based pay system the necessary data and information agencies need to provide in order to receive certification and thus raise the pay cap and total compensation limit for their senior executives. Specifically, agencies must provide, among other things, the data on senior executives' performance ratings, pay, and awards for the last 2 years to demonstrate that their systems, as designed and applied, make meaningful distinctions based on relative performance. Under the SES regulations, agencies that cannot provide these data can request provisional certification of their systems. In our view such provisional certifications should not be an option under any broad-based classification and compensation reform proposal. OPM should play a key leadership and oversight role in helping individual agencies and the government as a whole work towards overcoming a broad range of human capital challenges. Our understanding of the Administration's draft proposal is that OPM's leadership and oversight role is to expand in several areas, such as establishing a more market-based and performance-oriented pay system governmentwide and implementing a new core classification system. At the request of Chairman Collins and Ranking Member Lieberman, Senate Committee on Homeland Security and Governmental Affairs, along with Chairman Voinovich and Ranking Member Akaka, Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia, and to assist Congress as it considers OPM's additional responsibilities as outlined in this draft proposal, we are assessing OPM's current capacity to lead a broad-based governmentwide human capital reform effort, including providing appropriate assistance to federal agencies as they revise their human capital systems and conducting effective monitoring of any related reform implementation efforts. OPM is in the process of its own transformation--from being a rulemaker, enforcer, and independent agent to being more of a consultant, toolmaker, and strategic partner in leading and supporting executive agencies' human capital reform efforts and management systems. However, it is unclear whether OPM has the current capacity to discharge its new responsibilities. Specifically, OPM reported in its June 2001 workforce analysis that 4.2 percent of its employees (about 123 per year), on average, were projected to retire each year over the next 10 years, and the largest percentage of projected retirements, about 8 percent each year, would come from members of its SES. OPM's expected retirement rate for its workforce overall is more than the annual retirement rate of 2 percent governmentwide that we identified in a report issued in 2001. Our prior work has shown that when required to implement new legislation, OPM could have done more to accomplish its leadership and oversight mission in a decentralized human capital environment. For example, Congress passed a law in 1990 authorizing agencies to repay, at their discretion, their employees' student loans as a means to recruit and retain a talented workforce. In 2001, OPM issued final regulations to implement the program. The regulations were subsequently changed in 2004 to reflect legislative amendments that increased the ceiling on annual and total loan repayments. In our review of the federal student loan repayment program, we found that while human capital officials recognized OPM's efforts, they felt they could use more assistance on the technical aspects of operating the program, more coordination in sharing lessons learned in implementing it, and help consolidating some of the program processes. Similarly, we found that while OPM had several initiatives underway to assist federal agencies in using personnel flexibilities currently available to them in managing their workforces, OPM could more fully meet its leadership role to assist agencies in identifying, developing, and applying human capital flexibilities across the federal government. In addition, we reported that in its ongoing internal review of its existing regulations and guidance, OPM could more directly focus on determining the continued relevance and utility of its regulations and guidance by asking whether they provide the flexibility that agencies need in managing their workforces while also incorporating protections for employees. The Administration's draft proposal would amend some provisions of Title 5 of the U.S. Code covering labor management relations and adverse actions and appeals. Selected federal agencies have been implementing more market-based and performance-oriented pay for some time--some organizations for well over a decade--and thus they have built a body of experience and knowledge about what works well and what does not that allows the sharing of lessons learned. On the other hand, the federal government has had far less experience in changes regarding labor management relations and adverse actions and appeals. Congress granted DHS and DOD related new authorities in these areas and may wish to monitor the implementation of those authorities, including lessons learned, before moving forward for the rest of the federal government. Discussion of selected proposed amendments follows. Under Title 5, agencies now have a duty to bargain over conditions of employment, other than those covered by a federal statute; a governmentwide rule or regulation; or an agency rule or regulation for which the agency can demonstrate a compelling need. Under the draft proposal, agencies are to be obligated to bargain with employees only if the effect of the change in policy on the bargaining unit (or the affected part of the unit) is "foreseeable, substantial, and significant in terms of impact and duration." In addition, an agency now has the right to take any action to carry out the agency's mission in an emergency, without a duty to bargain. However, what constitutes an emergency can be defined through a collective bargaining agreement. Under the draft proposal, an agency is to have the right to take any action to prepare for, practice for, or prevent an emergency, or to carry out the agency's mission in an emergency. The draft proposal also adds a new definition of "emergency" as requiring immediate action to carry out critical agency functions, including situations involving an (1) adverse effect on agency resources, (2) increase in workload because of unforeseeable events, (3) externally imposed change in mission requirements, or (4) externally imposed budget exigency. By broadly defining "emergency" without time limits and adding to management's right an explicit authority to take action to prepare for, practice for, or prevent any emergency, the proposed change as we understand it, could serve to significantly restrict the scope of issues subject to collective bargaining. Under Title 5, conduct-based adverse actions are reviewed by the Merit Systems Protection Board (MSPB) under the preponderance of the evidence standard (there is more evidence than not to support the action). Performance-based adverse actions are reviewed under the lower standard of substantial evidence (evidence that a reasonable person would find sufficient to support a conclusion), but agencies must first give employees a reasonable opportunity to demonstrate acceptable performance under a performance improvement plan. Under the draft proposal, MSPB is to apply a single standard of proof--the higher standard of preponderance of the evidence--to review adverse actions taken for either performance or conduct. On the other hand, while due process features, such as advance written notice of a proposed adverse action are still required, performance improvement plans are no longer required. As we understand the draft proposal, applying the same standard to both types of adverse actions could add more consistency to the appeals process. Also under Title 5, MSPB now reviews penalties during the course of a disciplinary action against an employee to ensure that the agency considered relevant prescribed factors and exercised management discretion within tolerable limits of reasonableness. MSPB may mitigate or modify a penalty if the agency did not consider prescribed factors. Under the draft proposal, MSPB will be able to mitigate a penalty only if it is totally unwarranted in light of all pertinent circumstances. This change would restrict MSPB's ability to mitigate penalties. To help advance the discussion concerning how governmentwide human capital reform should proceed, GAO and the National Commission on the Public Service Implementation Initiative co-hosted a forum on whether there should be a governmentwide framework for human capital reform and, if so, what this framework should include. While there was widespread recognition among the forum participants that a one-size-fits- all approach to human capital management is not appropriate for the challenges and demands government faces, there was equally broad agreement that there should be a governmentwide framework to guide human capital reform. Further, a governmentwide framework should balance the need for consistency across the federal government with the desire for flexibility so that individual agencies can tailor human capital systems to best meet their needs. Striking this balance would not be easy to achieve, but is necessary to maintain a governmentwide system that is responsive enough to adapt to agencies' diverse missions, cultures, and workforces. While there were divergent views among the forum participants, there was general agreement on a set of principles, criteria, and processes that would serve as a starting point for further discussion in developing a governmentwide framework in advancing human capital reform, as shown in figure 1. We believe that these principles, criteria, and processes provide an effective framework for Congress and other decision makers to use as they consider and craft governmentwide civil service reform proposals. Moving forward with human capital reform, in the short term, Congress should consider selected and targeted actions to continue to accelerate the momentum to make strategic human capital management the centerpiece of the government's overall transformation effort. One option may be to provide agencies one-time, targeted investments that are not built into agencies' bases for future year budget requests. For example, Congress established the Human Capital Performance Fund to reward agencies' highest performing and most valuable employees. However, the draft proposal proposes to repeal the Human Capital Performance Fund. According to OPM, the provision was never implemented, due to lack of sufficient funding. We believe that a central fund has merit and can help agencies build the infrastructure that is necessary in order to implement a more market-based and performance-oriented pay system. To be eligible, agencies would submit plans for approval by OPM that incorporated features such as a link between pay for performance and the agency's strategic plan, employee involvement, ongoing performance feedback, and effective safeguards to ensure fair management of the system. In the first year of implementation, up to 10 percent of the amount appropriated would be available to train those involved in making meaningful distinctions in performance. These features are similar to those cited in the draft proposal as the basis for OPM's certification for agencies to implement their new pay and performance management systems. In addition, as agencies develop their pay for performance systems, they will need to consider the appropriate mix between pay awarded as base pay increases versus one-time cash increases, while still maintaining fiscally sustainable compensation systems that reward performance. A key question to consider is how the government can make an increasing percentage of federal compensation dependent on achieving individual and organizational results by, for example, providing more compensation as one-time cash bonuses rather than as permanent salary increases. However, agencies' use of cash bonuses or other monetary incentives has an impact on employees' retirement calculations since they are not included in calculating retirement benefits. Congress should consider potential legislative changes to allow cash bonuses that would otherwise be included as base pay increases to be calculated toward retirement and thrift savings benefits by specifically factoring bonuses into the employee's basic pay for purposes of calculating the employee's "high-3" for retirement benefits and making contributions to the thrift savings plan. As we continue to move forward with broader human capital reforms, they should be guided by a framework consisting of principles, criteria, and processes. While the reforms to date have recognized that the "one-size- fits-all" approach is not appropriate to all agencies' demands, challenges, and missions, a reasonable degree of consistency across the government is still desirable. Striking this balance is not easy to achieve, but is necessary to maximize the federal government's performance within available resources and assure accountability for the benefit of the American people. Chairman Porter, Representative Davis, and Members of the Subcommittee, this concludes my statement. I would be pleased to respond to any questions that you may have. For further information regarding this statement, please contact Lisa Shames, Acting Director, Strategic Issues, at (202) 512-6806 or [email protected]. Individuals making key contributions to this statement include Anne Inserra, Carole Cimitile, Janice Latimer, Belva Martin, Jeffrey McDermott, and Katherine H. Walker. The federal government must have the capacity to plan more strategically, react more expeditiously, and focus on achieving results. Critical to the success of this transformation are the federal government's people-- its human capital. Yet, in many cases the federal government has not transformed how it classifies, compensates, develops, and motivates its employees to achieve maximum results within available resources and existing authorities. A key question is how to update the federal government's compensation system to be market-based and more performance-oriented. GAO strongly supports the need to expand pay reform in the federal government. While implementing market-based and more performance- oriented pay systems is both doable and desirable, organizations' experiences in designing and managing their pay systems underscored three key themes that can guide federal agencies' efforts. The shift to market-based and more performance-oriented pay must be part of a broader strategy of change management and performance improvement initiatives. Market-based and more performance-oriented pay cannot be simply overlaid on most organizations' existing performance management systems. Rather, as a precondition to effective pay reform, individual expectations must be clearly aligned with organizational results, communication on individual contributions to annual goals must be ongoing and two-way, meaningful distinctions in employee performance must be made, and cultural changes must be undertaken. To further the discussion of federal pay reform, GAO partnered with key human capital stakeholders to convene a symposium in March 2005 to discuss public, private, and nonprofit organizations' successes and challenges in designing and managing market-based and more performance-oriented pay systems. organizations. Training and developing new and current staff to fill new roles and work in different ways will play a crucial part in building the capacity of the organizations. Organizations presenting at our symposium considered the following strategies in designing and managing their pay systems. 1. Focus on a set of values and objectives to guide the pay system. 2. Examine the value of employees' total compensation to remain competitive in the market. This testimony presents the strategies that organizations considered in designing and managing market-based and more performance-oriented pay systems and describes how they are implementing them. 3. Build in safeguards to enhance the transparency and help ensure the fairness of pay decisions. 4. Devolve decision making on pay to appropriate levels. 5. Provide training on leadership, management, and interpersonal skills to facilitate effective communication. 6. Build consensus to gain ownership and acceptance for pay reforms. 7. Monitor and refine the implementation of the pay system. www.gao.gov/cgi-bin/getrpt?GAO-05-1048T. To view the full product, including the scope and methodology, click on the link above. For more information, contact Lisa Shames at (202) 512-6806 or [email protected]. Moving forward, it is possible to enact broad-based reforms that would enable agencies to move to market-based and more performance-oriented pay systems. However, before implementing reform, each executive branch agency should demonstrate and the Office of Personnel Management should certify that the agency has the institutional infrastructure in place to help ensure that the pay reform is effectively and equally implemented. At a minimum, this infrastructure includes a modern, effective, credible, and validated performance management system in place that provides a clear linkage between institutional, unit, and individual performance-oriented outcomes; results in meaningful distinctions in ratings; and incorporates adequate safeguards. Critical to the success of the federal government's transformation are its people-- human capital. Yet the government has not transformed, in many cases, how it classifies, compensates, develops, and motivates its employees to achieve maximum results within available resources and existing authorities. One of the questions being addressed as the federal government transforms is how to update its compensation system to be more market based and performance oriented. While implementing market-based and more performance-oriented pay systems is both doable and desirable, organizations' experiences show that the shift to market-based and more performance-oriented pay must be part of a broader strategy of change management and performance improvement initiatives. GAO identified the following key themes that highlight the leadership and management strategies these organizations collectively considered in designing and managing market-based and more performance- oriented pay systems. 1. Focus on a set of values and objectives to guide the pay system. Values represent an organization's beliefs and boundaries and objectives articulate the strategy to implement the system. 2. Examine the value of employees' total compensation to remain competitive in the market. Organizations consider a mix of base pay plus other monetary incentives, benefits, and deferred compensation, such as retirement pay, as part of a competitive compensation system. To further the discussion of federal pay reform, GAO, the U.S. Office of Personnel Management, the U.S. Merit Systems Protection Board, the National Academy of Public Administration, and the Partnership for Public Service convened a symposium on March 9, 2005, to discuss organizations' experiences with market-based and more performance-oriented pay systems. Representatives from public, private, and nonprofit organizations made presentations on the successes and challenges they experienced in designing and managing their market-based and more performance-oriented pay systems. A cross section of human capital stakeholders was invited to further explore these successes and challenges and engage in open discussion. While participants were asked to review the overall substance and context of the draft summary, GAO did not seek consensus on the key themes and supporting examples. 3. Build in safeguards to enhance the transparency and ensure the fairness of pay decisions. Safeguards are the precondition to linking pay systems with employee knowledge, skills, and contributions to results. 4. Devolve decision making on pay to appropriate levels. When devolving such decision making, overall core processes help ensure reasonable consistency in how the system is implemented. 5. Provide training on leadership, management, and interpersonal skills to facilitate effective communication. Such skills as setting expectations, linking individual performance to organizational results, and giving and receiving feedback need renewed emphasis to make such systems succeed. 6. Build consensus to gain ownership and acceptance for pay reforms. Employee and stakeholder involvement needs to be meaningful and not pro forma. 7. Monitor and refine the implementation of the pay system. While changes are usually inevitable, listening to employee views and using metrics helps identify and correct problems over time. www.gao.gov/cgi-bin/getrpt?GAO-05-832SP. To view the full product, including the scope and methodology, click on the link above. For more information, contact J. Christopher Mihm at (202) 512-6806 or [email protected]. These organizations found that the key challenge with implementing market- based and more performance-oriented pay is changing the culture. To begin to make this change, organizations need to build up their basic management capacity at every level of the organization. Transitioning to these pay systems is a huge undertaking and will require constant monitoring and refining in order to implement and sustain the reforms. There is a growing understanding that the federal government needs to fundamentally rethink its current approach to pay and to better link pay to individual and organizational performance. Federal agencies have been experimenting with pay for performance through the Office of Personnel Management's (OPM) personnel demonstration projects. The demonstration projects took a variety of approaches to designing and implementing their pay for performance systems to meet the unique needs of their cultures and organizational structures, as shown in the table below. Demonstration Project Approaches to Implementing Pay for Performance Using competencies to evaluate employee performance. High-performing organizations use validated core competencies as a key part of evaluating individual contributions to organizational results. To this end, AcqDemo and NRL use core competencies for all positions. Other demonstration projects, such as NIST, DOC, and China Lake, use competencies based on the individual employee's position. Translating employee performance ratings into pay increases and awards. Some projects, such as China Lake and NAVSEA's Newport division, established predetermined pay increases, awards, or both depending on a given performance rating, while others, such as DOC and NIST, delegated the flexibility to individual pay pools to determine how ratings would translate into performance pay increases, awards, or both. The demonstration projects made some distinctions among employees' performance. Considering current salary in making performance-based pay decisions. Several of the demonstration projects, such as AcqDemo and NRL, consider an employee's current salary when making performance pay increases and award decisions to make a better match between an employee's compensation and contribution to the organization. Managing costs of the pay for performance system. According to officials, salaries, training, and automation and data systems were the major cost drivers of implementing their pay for performance systems. The demonstration projects used a number of approaches to manage the costs. Providing information to employees about the results of performance appraisal and pay decisions. To ensure fairness and safeguard against abuse, performance-based pay programs should have adequate safeguards, including reasonable transparency in connection with the results of the performance management process. To this end, several of the demonstration projects publish information, such as the average performance rating, performance pay increase, and award. www.gao.gov/cgi-bin/getrpt?GAO-04-83. To view the full product, including the scope and methodology, click on the link above. For more information, contact J. Christopher Mihm at (202) 512-6806 or [email protected]. GAO strongly supports the need to expand pay for performance in the federal government. How it is done, when it is done, and the basis on which it is done can make all the difference in whether such efforts are successful. High-performing organizations continuously review and revise their performance management systems. These demonstration projects show an understanding that how to better link pay to performance is very much a work in progress at the federal level. Additional work is needed to strengthen efforts to ensure that performance management systems are tools to help them manage on a day-to-day basis. In particular, there are opportunities to use organizationwide competencies to evaluate employee performance that reinforce behaviors and actions that support the organization's mission, translate employee performance so that managers make meaningful distinctions between top and poor performers with objective and fact-based information, and provide information to employees about the results of the performance appraisals and pay decisions to ensure reasonable transparency and appropriate accountability mechanisms are in place. The federal government is in a period of profound transition and faces an array of challenges and opportunities to enhance performance, ensure accountability, and position the nation for the future. High- performing organizations have found that to successfully transform themselves, they must often fundamentally change their cultures so that they are more results-oriented, customer-focused, and collaborative in nature. To foster such cultures, these organizations recognize that an effective performance management system can be a strategic tool to drive internal change and achieve desired results. Public sector organizations both in the United States and abroad have implemented a selected, generally consistent set of key practices for effective performance management that collectively create a clear linkage-- "line of sight"--between individual performance and organizational success. These key practices include the following. 1. Align individual performance expectations with organizational goals. An explicit alignment helps individuals see the connection between their daily activities and organizational goals. 2. Connect performance expectations to crosscutting goals. Placing an emphasis on collaboration, interaction, and teamwork across organizational boundaries helps strengthen accountability for results. 3. Provide and routinely use performance information to track organizational priorities. Individuals use performance information to manage during the year, identify performance gaps, and pinpoint improvement opportunities. Based on previously issued reports on public sector organizations' approaches to reinforce individual accountability for results, GAO identified key practices that federal agencies can consider as they develop modern, effective, and credible performance management systems. 4. Require follow-up actions to address organizational priorities. By requiring and tracking follow-up actions on performance gaps, organizations underscore the importance of holding individuals accountable for making progress on their priorities. 5. Use competencies to provide a fuller assessment of performance. Competencies define the skills and supporting behaviors that individuals need to effectively contribute to organizational results. 6. Link pay to individual and organizational performance. Pay, incentive, and reward systems that link employee knowledge, skills, and contributions to organizational results are based on valid, reliable, and transparent performance management systems with adequate safeguards. 7. Make meaningful distinctions in performance. Effective performance management systems strive to provide candid and constructive feedback and the necessary objective information and documentation to reward top performers and deal with poor performers. 8. Involve employees and stakeholders to gain ownership of performance management systems. Early and direct involvement helps increase employees' and stakeholders' understanding and ownership of the system and belief in its fairness. www.gao.gov/cgi-bin/getrpt?GAO-03-488. To view the full report, including the scope and methodology, click on the link above. For more information, contact J. Christopher Mihm at (202) 512-6806 or [email protected]. 9. Maintain continuity during transitions. Because cultural transformations take time, performance management systems reinforce accountability for change management and other organizational goals. 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 government must have the capacity to plan more strategically, react more expeditiously, and focus on achieving results. Critical to the success of this transformation are the federal government's people--its human capital. We have commended the progress that has been made in addressing human capital challenges in the last few years. Still, significant opportunities exist to improve strategic human capital management to respond to current and emerging 21st century challenges. A key question, for example, is how to update the federal government's classification and compensation systems to be more market-based and performance-oriented. The Administration's draft proposed "Working for America Act" is intended to ensure that agencies are equipped to better manage, develop, and reward their employees. Under this proposal, the Office of Personnel Management (OPM) is to design a new core classification and pay system, among other things. In addition, the draft proposal amends some provisions of Title 5 covering labor management relations and adverse actions and appeals. This testimony presents preliminary observations on the draft proposal; presents the principles, criteria, and processes for human capital reform; and suggests next steps for selected and targeted actions. GAO supports moving forward with appropriate human capital reforms and believes that implementing more market-based and performance-oriented pay systems is both doable and desirable. Importantly, broad-based human capital reform must be part of a broader strategy of change management and performance improvement initiatives and cannot be simply overlaid on existing ineffective performance management systems. In addition, organizations need to build up their basic management capacity and must have adequate resources to properly design and effectively implement more market-based and performance-oriented systems. Before implementing dramatic human capital reforms, executive branch agencies should follow a phased approach that meets a "show me" test. That is, each agency should be authorized to implement a reform only after it has shown it has met certain conditions, including an assessment of its related institutional infrastructure and an independent certification by OPM that such infrastructure meets specified statutory standards. In any event, OPM's and agencies' related efforts should be monitored by Congress. Given the above, GAO has the following observations on the draft proposal. Congress should make pay and performance management reforms the first step in government-wide reforms. The draft proposal incorporates many of the key principles of more market-based and performance-oriented pay systems and requires that OPM certify that each agency's pay for performance system meets prescribed criteria. Going forward, OPM should define in regulation what it will take in terms of fact-based and data-driven analyses for agencies to demonstrate that they are ready to receive this certification and implement new authorities. OPM should play a key leadership and oversight role in helping individual agencies and the government as a whole work towards overcoming a broad range of human capital challenges. OPM's role would be expanded in several areas under the draft proposal. It is unclear whether OPM has the current capacity to discharge these new responsibilities. Congress should move more cautiously in connection with labor management relations and adverse actions and appeals reforms. Selected federal agencies have been implementing more market-based and performance-oriented pay systems for some time and thus they have built a body of experience and knowledge about what works well and what does not that allows the sharing of lessons learned. On the other hand, the federal government has had far less experience in changes regarding labor management relations and adverse actions and appeals. Congress may wish to monitor the Departments of Homeland Security's and Defense's implementation of related authorities, including lessons learned, before moving forward in these areas for the rest of the federal government.

To obtain a full funding grant agreement, a project must first progress through a local or regional review of alternatives, develop preliminary engineering plans, and obtain FTA's approval for final design. TEA-21 requires that FTA evaluate projects against "project justification" and "local financial commitment" criteria contained in the act (see fig. 1). FTA assesses the project justification and technical merits of a project proposal by reviewing the project's mobility improvements, environmental benefits, cost-effectiveness, and operating efficiencies. In assessing a project's local financial commitment, FTA assesses the project's finance plan for evidence of stable and dependable financing sources to construct, maintain, and operate the proposed system or extension. Although FTA's evaluation requirements existed prior to TEA-21, the act requires FTA to (1) develop a rating for each criterion as well as an overall rating of "highly recommended," "recommended," or "not recommended" and use these evaluations and ratings in approving projects' advancement toward obtaining grant agreements; and (2) issue regulations on the evaluation and rating process. TEA-21 also directs FTA to use these evaluations and ratings to decide which projects to recommend to the Congress for funding in a report due each February. These funding recommendations are also reflected in DOT's annual budget proposal. In the annual appropriations act for DOT, the Congress specifies the amounts of funding for individual New Starts projects. Historically, federal capital funding for transit systems, including the New Starts program, has largely supported rail systems. Under TEA-21 the FTA Capital Program has been split 40 percent/40 percent/20 percent among New Starts, Rail Modernization, and Bus Capital grants. Although fixed- guideway bus projects are eligible under the New Starts program, relatively few bus-related projects are now being funded under this program. Although FTA has been faced with an impending transit budget crunch for several years, the agency is likely to end the TEA-21 authorization period with about $310 million in unused commitment authority if its proposed fiscal year 2003 budget is enacted. This will occur for several reasons. First, in fiscal year 2001, the Congress substantially increased FTA's authority to commit future federal funding (referred to as contingent commitment authority). This allowed FTA to make an additional $500 million in future funding commitments. Without this action, FTA would have had insufficient commitment authority to fund all of the projects ready for a grant agreement. Second, to preserve commitment authority for future projects, FTA did not request any funding for preliminary engineering activities in the fiscal year 2002 and 2003 budget proposals. According to FTA, it had provided an average of $150 million a year for fiscal years 1998 through 2001 for projects' preliminary engineering activities. Third, FTA took the following actions that had the effect of slowing the commitment of funds or making funds available for reallocation: FTA tightened its review of projects' readiness and technical capacity. As a result, FTA recommended fewer projects for funding than expected for fiscal years 2002 and 2003. For example, only 2 of the 14 projects that FTA officials estimated last year would be ready for grant agreements are being proposed for funding commitments in fiscal year 2003. FTA increased its available commitment authority by $157 million by releasing amounts associated with a project in Los Angeles for which the federal funding commitment had been withdrawn. Although the New Starts program will likely have unused commitment authority through fiscal year 2003, the carry-over commitments from existing grant agreements that will need to be funded during the next authorization period are substantial. FTA expects to enter the period likely covered by the next authorization (fiscal years 2004 through 2009) with over $3 billion in outstanding New Starts grant commitments. In addition, FTA has identified five projects estimated to cost $2.8 billion that will likely be ready for grant agreements in the next 2 years. If these projects receive grant agreements and the total authorization for the next program is $6.1 billion---the level authorized under TEA-21--most of those funds will be committed early in the authorization period, leaving numerous New Starts projects in the pipeline facing bleak federal funding possibilities. Some of the projects anticipated for the next authorization are so large they could have considerable impact on the overall New Starts program. For example, the New York Long Island Railroad East Side Access project may extend through multiple authorization periods. The current cost estimate for the East Side Access project is $4.4 billion, including a requested $2.2 billion in New Starts funds. By way of comparison, the East Side Access project would require about three times the total and three times the federal funding of the Bay Area Rapid Transit District Airport Extension project, which at about $1.5 billion was one of the largest projects under TEA-21. In order to manage the increasing demand for New Starts funding, several proposals have been made to limit the amount of New Starts funds that could be applied to a project, allowing more projects to receive funding. For instance, the President's fiscal year 2002 budget recommended that federal New Starts funding be limited to 50 percent of project costs starting in fiscal year 2004. (Currently, New Starts funding--and all federal funding--is capped at 80 percent.) A 50 percent New Starts cap would, in part, reflect a pattern that has emerged in the program. Currently, few projects are asking for the maximum 80 percent federal New Starts share, and many have already significantly increased the local share in order to be competitive under the New Starts program. In the last 10 years, the New Starts share for projects with grant agreements has been averaging about 50 percent. In April 2002, we estimated that a 50 percent cap on the New Starts share for projects with signed full funding grant agreements would have reduced the federal commitments to these projects by $650 million. Federal highway funds such as Congestion Mitigation and Air Quality funds can still be used to bring the total federal funding up to 80 percent. However, because federal highway funds are controlled by the states, using these funds for transit projects necessarily requires state- transit district cooperation. The potential effect of changing the federal share is not known. Whether a larger local match for transit projects could discourage local planners from supporting transit is unknown, but local planners have expressed this concern. According to transit officials, some projects could accommodate a higher local match, but others would have to be modified, or even terminated. Another possibility is that transit agencies may look more aggressively for ways to contain project costs or search for lower cost transit options. With demand high for New Starts funds, a greater emphasis on lower cost options may help expand the benefits of federal funding for mass transit; Bus Rapid Transit shows promise in this area. Bus Rapid Transit involves coordinated improvements in a transit system's infrastructure, equipment, operations, and technology that give preferential treatment to buses on urban roadways. Bus Rapid Transit is not a single type of transit system; rather, it encompasses a variety of approaches, including 1) using buses on exclusive busways; or 2) buses sharing HOV lanes with other vehicles; and 3) improving bus service on city arterial streets. Busways--special roadways designed for the exclusive use of buses--can be totally separate roadways or operate within highway rights-of-way separated from other traffic by barriers. Buses on HOV-lanes operate on limited-access highways designed for long-distance commuters. Bus Rapid Transit on Busways or HOV lanes is sometimes characterized by the addition of extensive park and ride facilities along with entrance and exit access for these lanes. Bus Rapid Transit systems using arterial streets may include lanes reserved for the exclusive use of buses and street enhancements that speed buses and improve service. During the review of Bus Rapid Transit systems that we completed last year, we found at least 17 cities in the United States were planning to incorporate aspects of Bus Rapid Transit into their operations. FTA has begun to support the Bus Rapid Transit concept and expand awareness of new ways to design and operate high capacity Bus Rapid Transit systems as an alternative to building Light Rail systems. Because Light Rail systems operate in both exclusive and shared right-of-way environments, the limits on their length and the frequency of service are stricter than heavy rail systems. Light Rail systems have gained popularity as a lower-cost option to heavy rail systems, and since 1980, Light Rail systems have opened in 13 cities. Our September 2001 report showed that all three types of Bus Rapid Transit systems generally had lower capital costs than Light Rail systems. On a per mile basis, the Bus Rapid Transit projects that we reviewed cost less on average to build than the Light Rail projects, on a per mile basis. We examined 20 Bus Rapid Transit lines and 18 Light Rail lines and found Bus Rapid Transit capital costs averaged $13.5 million per mile for busways, $9.0 million per mile for buses on HOV lanes, and $680,000 per mile for buses on city streets, when adjusted to 2000 dollars. For the 18 Light Rail lines, capital costs averaged about $34.8 million per mile, ranging from $12.4 million to $118.8 million per mile, when adjusted to 2000 dollars. On a capital cost per mile basis, the three different types of Bus Rapid Transit systems have average capital costs that are 39 percent, 26 percent, and 2 percent of the average cost of the Light Rail systems we reviewed. The higher capital costs per mile for Light Rail systems are attributable to several factors. First, the Light Rail systems contain elements not required in the Bus Rapid Transit systems, such as train signal, communications, and electrical power systems with overhead wires to deliver power to trains. Light Rail also requires additional materials needed for the guideway--rail, ties, and track ballast. In addition, if a Light Rail maintenance facility does not exist, one must be built and equipped. Finally, Light Rail vehicles, while having higher carrying capacity than most buses, also cost more--about $2.5 million each. In contrast, according to transit industry consultants, a typical 40-foot transit bus costs about $283,000, and a higher-capacity bus costs about $420,000. However, buses that incorporate newer technologies for low emissions or that run on more than one fuel can cost more than $1 million each. We also analyzed operating costs for six cities that operated both Light Rail and some form of Bus Rapid Transit service. Whether Bus Rapid Transit or Light Rail had lower operating costs varied considerably from city to city and depended on what cost measure was used. In general, we did not find a systematic advantage for one mode over the other on operating costs. The performance of the Bus Rapid Transit and Light Rail systems can be comparable. For example, in the six cities we reviewed that had both types of service, Bus Rapid Transit generally operated at higher speeds. In addition, the capacity of Bus Rapid Transit systems can be substantial; we did not see Light Rail having a significant capacity advantage over Bus Rapid Transit. For example, the highest ridership we found on a Light Rail line was on the Los Angeles Blue Line, with 57,000 riders per day. The highest Bus Rapid Transit ridership was also in Los Angeles on the Wilshire-Whittier line, with 56,000 riders per day. Most Light Rail lines in the United States carry about half the Los Angeles Blue Line ridership. Bus Rapid Transit and Light Rail each have a variety of other advantages and disadvantages. Bus Rapid Transit generally has the advantages of (1) being more flexible than Light Rail, (2) being able to phase-in service rather than having to wait for an entire system to be built, and (3) being used as an interim system until Light Rail is built. Light Rail has advantages, according to transit officials, associated with increased economic development and improved community image, which they believe justify higher capital costs. However, building a Light Rail system can have a tendency to provide a bias toward building additional rail lines in the future. Transit operators with experience in Bus Rapid Transit systems told us that one of the challenges faced by Bus Rapid Transit is the negative stigma potential riders attach to buses. Officials from FTA, academia, and private consulting firms also stated that bus service has a negative image, particularly when compared with rail service. Communities may prefer Light Rail systems in part because the public sees rail as faster, quieter, and less polluting than bus service, even though Bus Rapid Transit is designed to overcome those problems. FTA officials said that the poor image of buses was probably the result of a history of slow bus service due to congested streets, slow boarding and fare collection, and traffic lights. FTA believes that this negative image can be improved over time through bus service that incorporates Bus Rapid Transit features. A number of barriers exist to funding improved bus systems such as Bus Rapid Transit. First, an extensive pipeline of projects already exists for the New Starts Program. Bus Rapid Transit is a relatively new concept, and many potential projects have not reached the point of being ready for funding consideration because many other rail projects are further along in development. As of March 2002, only 1 of the 29 New Starts projects with existing, pending or proposed grant agreements uses Bus Rapid Transit, and 1 of the 5 other projects near approval plans to use Bus Rapid Transit. Some Bus Rapid Transit projects do not fit the exclusive right-of- way requirements of the New Starts Program and thus would not be eligible for funding consideration. FTA also administers a Bus Capital Program with half the funding level of the New Starts Program; however, the existing Bus Capital Program is made up of small grants to a large number of recipients, which limits the program's usefulness for funding major projects. Although FTA is encouraging Bus Rapid Transit through a Demonstration Program, this program does not provide funding for construction but rather focuses on obtaining and sharing information on projects being pursued by local transit agencies. Eleven Bus Rapid Transit projects are associated with this demonstration program.

The Federal Transportation Administration's (FTA) New Starts Program helps pay for designing and constructing rail, bus, and trolley projects through full funding grant agreements. The Transportation Equity Act for the 21st Century (TEA-21), authorized $6.1 billion in "guaranteed" funding for the New Starts program through fiscal year 2003. Although the level of New Starts funding is higher than ever, the demand for these resources is also extremely high. Given this high demand for new and expanded transit facilities across the nation, communities need to examine approaches that stretch the federal and local dollar yet still provide high quality transit services. Although FTA has been faced with an impending transit budget crunch for several years, it is likely to end the TEA-21 authorization period with $310 million in unused New Starts commitment authority if its proposed fiscal year 2003 budget is enacted. Bus Rapid Transit is designed to provide major improvements in the speed and reliability of bus service through barrier-separated busways, buses on High Occupancy Vehicle Lanes, or improved service on arterial streets. GAO found that Bus Rapid Transit was a less expensive and more flexible approach than Light Rail service because buses can be rerouted more easily to accommodate changing travel patterns. However, transit officials also noted that buses have a poor public image. As a result, many transit planners are designing Bus Rapid Transit systems that offer service that will be an improvement over standard bus service (see GAO-02-603).

From fiscal years 2003 through 2011, ORR cared for fewer than 10,000 unaccompanied children per year. Beginning in fiscal year 2012, the number of unaccompanied children apprehended at the southwest border by DHS and transferred to ORR custody rose to unprecedented levels and peaked in fiscal year 2014 at nearly 57,500 (see fig. 1). While the number of children served by ORR in fiscal year 2015 was less than the number served in fiscal year 2014, it was still higher than in previous years. Further, DHS data show that the number of unaccompanied children apprehended at the southwest border in fiscal 2016 through January is more than double the number apprehended during the same time period in fiscal year 2015. In response to the increased number of unaccompanied children in recent years, particularly in fiscal year 2014, ORR increased its shelter capacity (the number of beds it has available). We found that ORR was initially unprepared to care for the rapid increase in children needing services; however, ORR solicited new grantees to provide shelter services in both 2013 and 2014 and awarded additional cooperative agreements. From fiscal year 2011 through June of fiscal year 2015, the number of ORR grantees increased from 27 that operated 59 facilities to 57 that operated 140 facilities, and the number of beds available to serve unaccompanied children increased from almost 1,900 to nearly 7,800. The number of beds ORR needs depends on the number of unaccompanied children in its custody and how long these children stay in grantee facilities before they can be placed with sponsors. To further manage its capacity to care for the increased number of children, ORR updated policies and procedures to reduce the number of days children spend in its custody and expedite their release to sponsors. Specifically, ORR simplified documentation requirements for sponsors by eliminating notarization requirements and allowing photocopies (rather than original copies) of supporting documentation, such as birth certificates. ORR also removed the fingerprinting component of background checks for parents and legal guardians with no criminal or child abuse history, reduced the maximum number of days between approval of a child's release and actual discharge, and in some cases paid for a child's travel to the sponsor. According to shelter staff, these changes were feasible, in part, because most children come with contact information for a relative who can serve as a sponsor. Agency officials also noted that they can now more quickly release children to their parents or other relatives. We also found that ORR is taking other actions to ensure it has the capacity to meet demand caused by increases in the number of unaccompanied children and to minimize the risks of not being able to provide care and services to these children. Specifically, ORR developed a framework for fiscal year 2015 that included plans and steps to manage its capacity, based in part on the record levels of children needing care in 2014. This framework outlines its plans to continually monitor data on the referrals of unaccompanied children and other indicators, such as apprehensions and releases, to help it assess its capacity needs. It also includes key information ORR should have and mechanisms that should be in place to meet its needs, such as an inventory of available beds, timelines and decision points for determining if and when bed capacity should be increased, and ways to operationalize these decisions. ORR's bed capacity framework for fiscal year 2015 was based on the number of children served in fiscal year 2014. The number of children referred to ORR through most of fiscal year 2015, while high by historical standards, was less than expected, and ORR grantees had many unoccupied beds. However, the number of referrals began increasing toward the end of the summer and has remained relatively high through the beginning of fiscal year 2016. While developing the framework was a positive step and ORR officials said they continue to use the capacity framework as a "roadmap," we found that they have not updated this framework for fiscal year 2016 and have not established a systematic approach to update the framework on an annual basis to account for new information so that it remains current and relevant to changing conditions. According to federal standards for internal control, an agency's processes for decision making should be relevant to changing conditions and completely and accurately documented. We concluded that not having a documented and continually updated process for capacity planning may hinder ORR's ability to be prepared for an increase in unaccompanied children while at the same time minimizing excess capacity to conserve federal resources. We recommended in our February 2016 report that the Secretary of HHS direct ORR to develop a process to update this bed capacity framework on an annual basis. HHS concurred with our recommendation. ORR relies on grantees to provide care for unaccompanied children, such as housing and educational, medical, and therapeutic services, and to document in children's case files the services they provide. However, in our February 2016 report we found that documents were often missing from the 27 randomly selected case files we reviewed. Specifically, 14 case files were missing a legal presentation acknowledgement form, 10 were missing a record of group counseling sessions, and 5 were missing clinical progress notes. Grantees are required to provide these services and document that they did so. In addition, we identified several cases in which forms that were present in the files were not signed or dated. Although ORR uses its web-based data system to track some information about the services children receive, and grantees report on the services they provide in their annual reports, the documents contained in case files are the primary source of information about the services provided to individual children. Without all of the documents included in the case files, it is difficult for ORR to verify that required services were actually provided in accordance with ORR policy and cooperative agreements. ORR's most comprehensive monitoring of grantees occurs during on-site monitoring visits. However, we found that onsite visits to facilities has been inconsistent. According to ORR documents, during on-site monitoring visits, ORR project officers spend a week at facilities touring, reviewing children's case files and personnel files, and interviewing children and staff. Prior to fiscal year 2014, project officers were supposed to conduct on-site monitoring of facilities at least once a year. However, our review of agency data found that many facilities went several years without receiving a monitoring visit. For example, ORR did not visit 15 facilities for as many as 7 years. In 2014, ORR revised its on- site monitoring program to ensure better coverage of grantees and implemented a biennial on-site monitoring schedule. Nevertheless, ORR did not meet its goal to visit all of its facilities by the end of fiscal year 2015, citing lack of resources. Monitoring visits are intended to provide an opportunity to identify program deficiencies or areas where programs are failing to comply with ORR policies. According to standards for internal control, management should establish and operate monitoring activities to monitor the internal control system and evaluate the results. Monitoring generally should be designed to assure that it is ongoing and occurs in the course of normal operations, is performed continually, and is ingrained in the agency's operations. We concluded that without consistently monitoring its grantees, ORR cannot know whether they are complying with their agreements and that children are receiving needed services. We recommended in our February 2016 report that the Secretary of HHS direct ORR to review its monitoring program to ensure that onsite visits are conducted in a timely manner, case files are systematically reviewed as part of or separate from onsite visits, and that grantees properly document the services they provide to children. HHS concurred, and in its response to the report described several of its other monitoring efforts, and stated that it has created a new monitoring initiative workgroup to examine opportunities for further improvement. ORR grantees that provide day-to-day care of unaccompanied children are responsible for identifying and screening sponsors prior to releasing children to them. During children's initial intake process, case managers ask them about potential sponsors with whom they hope to reunite. Within 24 hours of identifying potential sponsors, case managers are required to send them a Family Reunification Application to complete. The application includes questions about the sponsor and other people living in the sponsor's home, including whether anyone in the household has a contagious disease or criminal history. Additionally, the application asks for information about who will care for the child if the sponsor is required to leave the United States or becomes unable to provide care. Sponsors are also asked to provide documents to establish their identity and relationship to the child. Grantees conduct background checks on potential sponsors. The types of background checks conducted depend on the sponsor's relationship to the child (see table 1). In certain circumstances prescribed by the Trafficking Victims Protection Reauthorization Act or ORR policy, a home study must also be conducted before the child is released to the sponsor. Additionally, in certain situations, such as where there is a documented risk to the safety of the unaccompanied child, the child is especially vulnerable, and/or the case is being referred for a mandatory home study, other household members are also subjected to background checks. In our February 2016 report, we found that between January 7, 2014, and April 17, 2015, nearly 52,000 children from El Salvador, Guatemala, or Honduras were released to sponsors by ORR. Of these children, nearly 60 percent were released to a parent. Fewer than 9 percent of these children were released to a non-familial sponsor, such as a family friend, and less than 1 percent of these children were released to a sponsor to whom their family had no previous connection (see table 2). In the fall of 2014, ORR officials told us that they had not seen evidence that adults are fraudulently sponsoring unaccompanied children. Nonetheless, ORR officials told us that ORR has been monitoring the number of children it releases to sponsors, through its web-based portal, to help ensure that individuals are not sponsoring too many children unrelated to them. In August 2015, two individuals pleaded guilty to charges related to luring Guatemalan children into the United States on false pretenses in 2014. According to the indictment, one of the individuals submitted fraudulent information to ORR officials to obtain custody of six children, among other things. There is limited information available about the services provided to unaccompanied children after they leave ORR custody. According to ORR officials, a relatively small percentage of unaccompanied children received post-release services, and they said ORR's responsibility for the other children typically ended once it transferred custody of the children to their sponsors. The Trafficking Victims Protection Reauthorization Act requires ORR to provide post-release services to children if a home study was conducted, and authorizes ORR to provide these services to some additional children. According to ORR data, in fiscal year 2014, slightly less than 10 percent of unaccompanied children received post-release services, including those for whom a home study was conducted. Post- release services are limited in nature and typically last a relatively short time. These services include direct assistance to the child and sponsor by ORR grantees in the form of guidance to the sponsor to ensure the safest environment possible for the child, as well as assistance accessing legal, medical, mental health, and educational services, and initiating steps to establish guardianship, if necessary. These services can also include providing information about resources available in the community and referrals to such resources. Recently, ORR has taken steps to expand eligibility criteria for post- release services to additional children. According to ORR officials, all children released to a non-relative or distant relative are now eligible for such services. In addition, in May 2015, ORR began operating a National Call Center help-line. Children who contact ORR's National Call Center within 180 days of release who have experienced or are at risk of experiencing a placement disruption are also now eligible for post-release services according to ORR officials. And in August 2015, ORR instituted a new policy requiring grantee facility staff to place follow-up calls, referred to as Safety and Well Being follow up calls, to all children and their sponsors 30 days after the children are placed to determine whether they are still living with their sponsors, enrolled in or attending school, aware of upcoming removal proceedings, and safe. ORR policy requires grantees to attempt to contact the sponsor and child at least three times. Although there is limited post-release information for unaccompanied children, ORR is in a position to compile and share the data it collects internally and with other federal and state agencies to help them better understand the circumstances these children face when they are released to their sponsors. This is because ORR already has some information from its post-release grantees on services provided to children after they leave ORR custody, and its newly instituted well-being calls and National Call Center allow it to collect additional information about these children. However, ORR does not have processes to ensure that all of these data are reliable, systematically collected, and compiled in summary form to provide useful information about this population for its use and for other government agencies, such as state child welfare services. Federal internal control standards require that an agency have relevant, reliable, and timely information to enable it to carry out its responsibilities. As a result, in our February 2016 report, we recommended that the Secretary of HHS direct ORR to develop a process to ensure all information collected through its existing post-release efforts are reliable and systematically collected so that the information can be compiled in summary form and provide useful information to other entities internally and externally. HHS concurred and stated that ORR will implement an approved data collection process that will provide more systematic and standardized information on post-release services and that it would make this information available to other entities internally and externally. We found that services available to unaccompanied children through local service providers are typically the same as those available to other children without lawful immigration status. For example, children without lawful immigration status are generally not eligible for federal benefits, such as the Supplemental Nutrition Assistance Program, Medicaid, and Temporary Assistance for Needy Families; however, they are eligible for other federal benefits such as emergency medical assistance, some public health assistance, and school meals. Local service providers we spoke with in six counties told us that the children's status would have no effect on eligibility for many of the services they provide. For example, school districts are required to educate students regardless of their immigration status. Similarly, unaccompanied children were not precluded from receiving services at health clinics we spoke with. Some local service providers expressed concerns that unaccompanied children might have unmet needs or face barriers to receiving some necessary services. For example, representatives we spoke with in four of the six school districts, as well as representatives from a county office of education, discussed the mental and behavioral health needs of these children. Similarly, local services providers told us these children had previous exposure to violence and trauma and in some cases experienced challenges related to reunification with parents they had not seen for many years. Six service providers said that these factors could contribute to behavioral and mental health needs or make the children more susceptible to gang recruitment and trafficking. Some school district and other service providers reported challenges such as attracting bilingual professionals, such as mental health providers, making it difficult for these children to obtain needed services. In addition, unaccompanied children also face barriers similar to those faced by other children without lawful immigration status such as lack of health insurance, lack of knowledge about where to seek services, fear of disclosing their immigration status, and language barriers. We also found that the level of awareness about, and services available to, unaccompanied children varied across the jurisdictions in which we spoke with stakeholders, with some jurisdictions appearing to have more resources than others. For example, in one jurisdiction we visited, the mayor's office had established a working group related to unaccompanied children that included representatives from several city departments and nonprofits. In this city, representatives from the health and education departments regularly attended immigration court to screen and enroll children in the state's Children's Health Insurance Program and to help with school enrollment. Conversely, representatives from two other mayors' offices told us that they were unaware that unaccompanied children were living in their city or had limited knowledge about the issue. With respect to unaccompanied children's immigration proceedings, we found that there are several possible outcomes and that the outcomes for many children have not yet been determined. An unaccompanied child who is in removal proceedings can apply for various types of lawful immigration status with DHS's U.S. Citizenship and Immigration Services (USCIS), including asylum and Special Immigration Juvenile status. USCIS's asylum officers have initial jurisdiction of any asylum application filed by an unaccompanied child, even if a child is in removal proceedings. In July 2015, the Associate Director of the Refugee, Asylum and International Operations Directorate at USCIS testified that USCIS has received increasing numbers of asylum applications from unaccompanied children in recent years. USCIS received 534 such applications in fiscal year 2011 and 6,990 in fiscal year 2014. The Associate Director testified that since fiscal year 2009, USCIS has granted asylum to unaccompanied children at a rate of 42.6 percent, similar to the overall rate at which all new asylum applications were approved. If unaccompanied children have not yet sought, or are not granted, certain immigration benefits within the jurisdiction of USCIS, there are several other possible outcomes and various forms of relief that may be available to them during immigration proceedings. For example, an immigration judge may order them removed from the United States, administratively close their case, terminate their case, allow them to voluntary depart the United States, or grant them relief or protection from removal. From July 18, 2014, when DOJ's Executive Office for Immigration Review began to consistently use a code to identify cases involving unaccompanied children, to July 14, 2015, DHS initiated more than 35,000 removal proceedings for unaccompanied children. Of these 35,000 removal proceedings, EOIR data indicate that as of July 14, 2015, an immigration judge issued an initial decision in nearly 13,000 proceedings (or 36 percent). Of those 13,000 decisions, about 7,000 (or 55 percent) resulted in a removal order for the unaccompanied child. According to EOIR data, about 6,100 (or 88 percent) of those initial decisions that resulted in removal orders were issued in absentia, which is when a child fails to appear in court for their removal proceedings and the immigration judge conducts the proceeding in the child's absence. However, a judge's initial decision does not necessarily indicate the end of the removal proceedings. For example, cases that are administratively closed can be reopened, new charges may be filed in cases that are terminated, and children may appeal a removal order. In addition, a child who receives a removal order in absentia, and with respect to whom a motion to reopen their case has been properly filed, is granted a stay of removal pending a decision on the motion by the immigration judge. Overall, according to DHS's Immigration and Customs Enforcement (ICE) data, from fiscal year 2010 through August 15, 2015, based on final orders of removal, ICE removed 10,766 unaccompanied children, 6,751 of whom were from El Salvador, Guatemala, or Honduras. Chairman Grassley, Ranking Member Leahy, and Members of the Committee, this concludes my prepared remarks. I would be happy to answer any questions that you may have. For further information regarding this testimony, 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 testimony include Gale Harris (Assistant Director), David Barish (Analyst-in-Charge), James Bennett, Ramona Burton, Jamila Jones Kennedy, Jean McSween, James Rebbe, Almeta Spencer, and Kate van Gelder. 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.

ORR is responsible for coordinating and implementing the care and placement of unaccompanied children. The number of children placed in ORR's care rose from nearly 6,600 in fiscal year 2011 to nearly 57,500 in fiscal year 2014. GAO was asked to review how ORR managed their care. This testimony is based on GAO's February 2016 report and addresses (1) ORR's response to the increase in unaccompanied children, (2) how ORR cares for children in its custody and monitors their care, (3) how ORR identifies and screens sponsors for children, and (4) what is known about services, challenges, and the status of removal proceedings for children after they leave ORR custody. For its February 2016 report, GAO reviewed relevant federal laws and regulations, ORR policies, and ORR and Executive Office for Immigration Review data. GAO also visited nine ORR grantee facilities in three states selected to vary in the type of care provided, shelter size, and location, and conducted a random, non-generalizable case file review of 27 case files of children released from these facilities. GAO interviewed agency officials and community stakeholders in six counties that received unaccompanied children, representing diversity in geographic location, size, and demographics. In fiscal year 2014, nearly 57,500 children traveling without their parents or guardians (referred to as unaccompanied children) were apprehended and transferred to the care of the Department of Health and Human Services' Office of Refugee Resettlement (ORR). Most of these children were from Central America. GAO found that ORR was initially unprepared to care for that many children; however, the agency increased its bed capacity. Given the unprecedented demand for capacity in 2014, ORR developed a plan to help prepare it to meet fiscal year 2015 needs. The number of children needing ORR's care declined significantly through most of fiscal year 2015, but began increasing again toward the end of the summer. Given the inherent uncertainties associated with planning for capacity needs, ORR's lack of a process for annually updating and documenting its plan inhibits its ability to balance preparations for anticipated needs while minimizing excess capacity. ORR relies on grantees to provide care for unaccompanied children, including housing and educational, medical, and therapeutic services. GAO's review of a sample of children's case files found that they often did not contain required documents, making it difficult to verify that all required services were provided. ORR revised its on-site monitoring program in 2014 to ensure better coverage of grantees. However, ORR was not able to complete all the visits it planned for fiscal years 2014 and 2015, citing lack of resources. By not monitoring its grantees consistently, ORR may not be able to identify areas where children's care is not provided in accordance with ORR policies and the agreements with grantees. ORR grantees conduct various background checks on potential sponsors prior to releasing children to them. These potential sponsors are identified and screened by the grantees as part of their responsibilities for the unaccompanied children in their care. The extent of the checks conducted depends on the relationship of the sponsor to the child. Between January 2014 and April 2015, ORR released nearly 52,000 children from El Salvador, Guatemala, or Honduras to sponsors. In nearly 90 percent of these cases, the sponsors were a parent or other close relative already residing in the United States. Sponsors do not need to have legal U.S. residency status. There is limited information available on post-release services provided to children after they leave ORR care. In part, this is because ORR is only required to provide services to a small percentage of children, such as those who were victims of trafficking. In May 2015, ORR established a National Call Center to assist children who may be facing placement disruptions, making post-release services available to some of them. Also, in August 2015, ORR began requiring well-being follow-up calls to all children 30 days after their release. ORR is collecting information through these new initiatives, but does not currently have a process to ensure that the data are reliable, systematically collected, or compiled in summary form. Service providers GAO spoke with also noted that some of these children may have difficultly accessing services due to the lack of bilingual services in the community, lack of health insurance, or other barriers. In its February 2016 report, GAO recommended that HHS (1) develop a process to regularly update its capacity plan, (2) improve its monitoring of grantees, and (3) develop processes to ensure its post-release activities provide reliable and useful summary data. HHS agreed with GAO's recommendations.

FMS receives payment records from and makes payments on behalf of most federal agencies. However, a number of federal agencies have their own disbursing authority. For example, USPS paid about $42 billion in salary and benefits to almost 800,000 career employees in calendar year 1999, and entered into more than 47,000 contracts with vendors in calendar year 1998, totaling almost $8 billion. DOD disbursed over $295 billion in fiscal year 2000, including about $150 billion in contractor and vendor payments and about $100 billion in salary and retirement payments. In addition, Medicare contractors processed over 900 million fee-for-service claims during fiscal year 2000, totaling nearly $175 billion. In addition to disbursing payments for various federal agencies, FMS provides centralized debt collection services for most federal agencies. To aid in federal debt collection, FMS has in place the Treasury Offset Program, which uses a centralized database of delinquent debts that have been referred for offset against federal payments. This database includes federal nontax debts and federal tax debts, as well as state tax debts and child support debts. FMS currently matches federal tax refunds, federal retirement and vendor payments, and certain federal salary and social security benefit payments against its database of delinquent debts, and when a match of both TIN and name control occurs, FMS offsets the payment, thereby reducing or eliminating the debt. FMS plans to include some non-FMS disbursed federal salary payments in the Treasury Offset Program in the latter half of 2001. A provision included in the Taxpayer Relief Act of 1997 enhanced IRS' ability to collect delinquent federal tax debt by authorizing IRS to continuously levy up to 15 percent of certain federal payments made to delinquent taxpayers. FMS modified the Treasury Offset Program to enable IRS to electronically serve a tax levy to FMS once IRS has notified the delinquent taxpayer of the pending levy. In July 2000, IRS began adding tax debts to FMS' database of delinquent federal debts, thus initiating the continuous levy program. For this program, FMS compares federal payee information from agency payment records with IRS' accounts receivable records. When a match of both the TIN and name control occur, FMS informs IRS of the match and IRS then notifies the taxpayer of the pending tax levy. If the taxpayer fails to make an effort to satisfy the tax debt within 30 days, such as by payment in full or entering into an installment agreement, IRS will then instruct FMS to begin levying 15 percent of subsequent payments made to the taxpayer or the exact amount of tax owed if it is less than 15 percent of the next payment. For payments disbursed on behalf of other agencies, FMS deducts the amount to be levied before making the payment, and the levied amount is then credited to IRS. In an April 2000 report, we estimated that IRS could potentially collect as much as $478 million annually through this program. Based on matching federal payments made by the agencies to IRS' accounts receivable data, we estimate that including payments disbursed by USPS, DOD, and CMS in the continuous levy program could result in recovering at least $270 million annually from about 70,000 delinquent taxpayers. An additional $16 million in delinquent taxes could be recovered annually from about 656 vendors if IRS were to provide FMS with the different names these vendors have used for tax purposes when FMS matches vendor payment data against IRS' accounts receivable data. Our analysis of IRS' accounts receivable data as of June 30, 2000, showed that about 70,400 taxpayers received about $1.9 billion in payments--about $8.2 billion on a annualized basis--from either USPS, DOD, or CMS, and the TIN and name on their payment records exactly matched the TIN and name on IRS' accounts receivable records. These taxpayers owed over $1 billion in delinquent taxes at the time they received these payments and met IRS' criteria to be included in the continuous levy program. As shown in table 1, we estimate that IRS could recover as much as $277.5 million annually if these payments were included in the continuous levy program. Almost half of the $277.5 million in delinquent taxes that could be recovered would come from vendor payments. The rest would come from wage and salary payments to employees and retirement payments. The amount of delinquent taxes recovered annually could be somewhat lower because some taxpayers might make other arrangements with IRS to resolve their tax debts once they receive a notice of levy. For example, in an effort to avoid a pending tax levy, some taxpayers might contact IRS to arrange to pay their delinquent tax in full or through entering into an installment agreement or submitting an offer-in-compromise. However, such actions on the part of the taxpayer in response to the levy notice would be an added benefit of the program. Although the amount of delinquent taxes recovered could be somewhat lower, as noted earlier, our estimates of the amount of delinquent taxes that might be recovered are understated because we did not receive data for over 50 percent of the Medicare vendor payments made for the time period we reviewed. In addition, we were unable to match about $3.4 billion in DOD vendor payments against IRS' accounts receivable data because DOD's payment records did not contain a TIN. According to DOD officials, DOD has recently increased its emphasis on requiring vendors to provide a TIN when registering to do business with DOD. Under procedures for vendor payments that are paid by FMS and currently subject to continuous levy, IRS' file of accounts receivable data provided to FMS includes only the most recent name a vendor has used for tax purposes. As a result, FMS' ability to exactly match the vendor name on payment records against IRS' tax debts is limited. IRS already makes additional names for individual taxpayers included in its databases available to FMS for use in the existing continuous levy program. For example, if taxpayers change their name when they marry, the name used as a single person would be sent to FMS along with their married name. This is not the case for businesses. For vendor payments currently paid by FMS and thus included in the continuous levy program, if a business were to change its name on its federal tax return, IRS would provide FMS with the most current name in its records, but not the prior name. When making our overall estimates of delinquent taxes that could be recovered if USPS, DOD, and CMS Medicare vendor payments were included in the continuous levy program, we determined the amount of additional revenue that could be raised if IRS changed its policy and provided FMS with all of the names it has for vendors. In addition to the 70,400 taxpayers whose TIN and name on the payment records exactly matched the TIN and name on IRS' accounts receivable records, we found 1,228 instances in which the TIN on the vendor payment records exactly matched the TIN on IRS' accounts receivable records, but the name on the payment records did not exactly match the name on IRS' records. For 656 of the 1,228 vendors, we found different names used by these vendors in an IRS database that showed they were in fact the delinquent taxpayers. There were no additional names in the IRS database for the remaining 572 vendors. The 656 taxpayers for which there were additional names owed about $26 million in delinquent taxes. We estimate that IRS could recover about $16 million annually if the different names it has for vendors were provided to FMS for the continuous levy program. If IRS were to provide FMS with the different names it has for business taxpayers, this would benefit the current continuous levy program by increasing the instances in which FMS could match the name in both records, as required before a levy can be made. IRS officials agreed and indicated that providing such a file of additional business names to FMS could be done and would be well worth the effort. FMS officials indicated they were in favor of receiving additional business names for use in the continuous levy program. Whether federal payments made by USPS, DOD, and CMS could be included in the continuous levy program and, if so, when varied by agency and type of payment. FMS plans to receive and include USPS and DOD salary and wage payments, as well as military retirement payments, in the Treasury Offset Program within the next 3 years, thus making them available for continuous levy and enabling IRS to begin collecting about half of the $277.5 million in potential annual tax recoveries mentioned earlier. Vendor payments could also be included in the continuous levy program, with the full range of USPS payments possibly included in less than a year, DOD payments possibly included within 3 years, and CMS payments possibly included within about 5 years. However, with the exception of some DOD vendor payments, officials from FMS, IRS, and the three agencies have not discussed when and how all of these agencies' vendor payments could be included in the continuous levy program and whether practical options exist to include some portion of the vendor payments in the program before all such payments are available. FMS officials stated that their discussions with USPS have focused on including salary payments in the Treasury Offset Program rather than vendor payments. USPS plans to provide employee salary payments to FMS for inclusion in the Treasury Offset Program, and FMS is working with USPS to develop a specific implementation date. According to FMS officials, once USPS salary payments are available for the Treasury Offset program, they could be included in the continuous levy program about a month later. USPS officials stated that, although they have not had any recent discussions with FMS about including vendor payments in the Treasury Offset Program, they do not believe any obstacles would prevent making vendor payments available to FMS, since all USPS vendor payments are disbursed from one payment center. Officials indicated that within about 4 months of FMS' requesting them to do so, they could likely be ready to provide vendor payments to FMS and to levy payments for which FMS indicates a match with IRS' accounts receivable data. USPS officials did say that levying vendor payments could present some challenges. For example, USPS vendor payments generally are not made on a particular schedule, but rather, are controlled by terms specified in individual contracts. As a result, unlike biweekly salary payments, USPS disburses vendor payments daily throughout the business week. Therefore, vendor data exchanges between USPS and FMS would likely have to occur with greater frequency than salary data exchanges. However, USPS officials stated that the Prompt Payment Act requires that vendor payments be deferred until the pay cycle immediately preceding the payment due date. This should provide an adequate interval to offset such payments, particularly if the vendor data exchanges with FMS were to occur either weekly or biweekly. USPS officials also stated that USPS does not currently offset vendor payments to recover debts owed to USPS, and therefore, specific offset procedures would have to be developed. However, these officials were confident that they could modify the USPS system to enable them to flag any vendor payments requiring offset identified through the Treasury Offset Program. They further stated that such an offset would require manual intervention to make the offset and reconcile the vendor's account. Although USPS officials said that they could make vendor payments available to FMS within about 4 months of FMS' requesting such data, USPS and FMS officials have not discussed specific arrangements for doing so, such as when FMS could be ready to receive USPS vendor payment data or how long it might take USPS to develop procedures for performing such offsets. FMS is working with DOD to include civilian, military retirement, and military active duty payments in the Treasury Offset Program, thus eventually making these types of payments available for the continuous levy program. According to DOD officials, the approximate timeframes that have been established for providing DOD payments to FMS are as follows: DOD civilian salary payments in the latter part of 2001, DOD military retirement payments in 2002, and DOD military active duty payments in 2003. DOD has also initiated preliminary discussions with FMS about providing some vendor payments to FMS. These payments are all made from one payment system maintained at one DOD Defense Finance and Accounting Service (DFAS) location and accounted for about 48 percent of all DOD vendor payments made in fiscal year 2000. However, DOD officials have not specifically discussed providing other vendor payments to FMS in the near future, and they have concerns regarding the current capability to make other vendor payments available for the continuous levy program because of DOD's decentralized vendor payment systems. For example, vendors providing goods and services to three of the military branches- Army, Air Force, and Navy-are paid from separate vendor payment systems maintained at various DFAS locations. In addition, there are separate vendor payment systems for processing certain specialty items, such as fuels and commissary resale products. DOD officials stated that DFAS staff do not currently have the capability to track multiple payments made from the various vendor payment systems to a particular vendor. As a result, if they were to provide vendor payments to FMS from these decentralized payment systems, DOD officials were concerned that there would be a risk of offsetting more in payments than a vendor might owe in delinquent taxes. Although DOD officials expressed concerns about offsetting more in payments than a vendor might owe in delinquent taxes, IRS officials indicated there are controls in the continuous levy program to prevent such overpayments. For example, IRS provides FMS with a weekly file updating the balance due for each account subject to continuous levy. In addition, FMS has the capability to update the balance due for each account after each payment is levied, thus enabling FMS to identify when a tax debt has been reduced to zero. In addition, selected staff in each IRS office are authorized to directly access FMS' levy database to rescind a levy if necessary, such as for taxpayers subject to a continuous levy that decide to either fully pay the tax debt or enter into an installment agreement. FMS and IRS officials have not discussed these controls with DOD to determine whether they would mitigate DOD's overpayment concerns and pave the way for other types of vendor payments to be provided to FMS for the continuous levy program, in addition to those vendor payments currently under consideration. DOD is currently developing a centralized vendor payment system that could increase its capability to eventually provide all vendor payments to FMS. According to DOD officials, the multiple vendor payment systems currently in use are to be replaced by a single system known as the Defense Procurement Payment System. The latest DOD estimate indicates that the initial phase for implementing the new system will begin in the latter part of fiscal year 2001. DOD officials estimate that the new system may be fully operational by the latter part of fiscal year 2003 or the early part of fiscal year 2004. However, they indicated that this is a "best-case" scenario. FMS and CMS have not held any discussions related to including Medicare vendor payments in the continuous levy program. CMS and Medicare contractors we spoke with agreed that including all Medicare payments in the continuous levy program would not be possible for several years owing to the decentralized payment system in which the Medicare program operates. CMS administers the Medicare program through about 50 health care contractors, which process and pay over 900 million fee-for- service claims totaling nearly $175 billion annually. These contractors are responsible for verifying the accuracy of the name and TIN used by health care providers that bill the Medicare program for reimbursement. Thus, the ability to identify and subsequently levy the payments made to Medicare providers who owe federal taxes would depend on establishing effective coordination between IRS and FMS and each of the contractors that pay the claims. The possibility of including Medicare vendor payments in the continuous levy program is further complicated because CMS contractors currently use one of six different computerized systems to process and pay claims. Although CMS eventually plans to have all of its contractors use one of three standardized claims processing systems, this consolidation is not expected to be completed before 2004. The contractors responsible for maintaining the three standardized systems believe that integrating a continuous levy process into Medicare claims processing systems is possible, but the systems would likely have to be modified and tested before implementation. Planned enhancements to the CMS accounting and provider enrollment systems may improve the likelihood that Medicare vendor payments could be included in the continuous levy program in the future. For example, in order to comply with federal financial management systems requirements, the agency is developing the CMS Integrated General Ledger and Accounting System. As currently envisioned by CMS, this system would contain detailed information on each Medicare claim paid, and as such, might offer FMS and IRS a central point of coordination for continuously levying Medicare vendor payments. Also, CMS is developing a centralized database of updated information on all health care providers that bill the Medicare program. This system is intended to help ensure that only qualified providers with a valid TIN enroll in and receive payments from the Medicare program. Once fully operational, this system is expected to interface with other CMS systems, thereby helping to ensure that the name and TIN used by providers have been validated by IRS. Neither system is scheduled to be fully operational before late 2006. Although these new systems may improve the likelihood that CMS vendor payments could be continuously levied in the future, FMS and CMS officials have not held discussions to ensure this result. Medicare contractors already offset payments to vendors for various reasons, such as recovery of previously overpaid claim amounts, which could result from either inadvertent billing errors or intentional misrepresentations. However, FMS and CMS officials have not explored whether these processes for offsetting vendor payments could support including some CMS vendor payments in the continuous levy program before late 2006. In addition to the specific levy authority IRS has through the continuous levy program under section 6331(h), IRS has general levy authority under Internal Revenue Code section 6331 to collect federal tax debts by issuing a levy notice directly to a federal agency. The continuous levy program provides IRS with an automated process for serving tax levies and collecting delinquent taxes through FMS. On the other hand, in order to levy payments under its general levy authority IRS must identify that an agency is making payments to a delinquent taxpayer. Unlike the 15-percent levy amount limitation for the continuous levy program, under its general levy authority, IRS can levy up to 100 percent of a taxpayer's property and rights to property in some cases. IRS currently uses its general levy authority to levy federal salary and retirement payments. However, according to officials, IRS uses its general levy authority less frequently to levy federal vendor payments, partly because IRS has limited ability to identify and serve levies against vendor payments. According to IRS officials, almost all information IRS has on vendor payments comes from annual information returns that federal agencies and contractors are required to file for such payments. It takes IRS several months to process information returns and make them available to collection staff so they can identify potential levy sources. According to IRS officials, information return data are of little use because there is no certainty that an individual or business that received payments in a past year would receive payments in the current year. IRS officials acknowledged that obtaining current information on taxpayers that may be receiving DOD and CMS vendor payments might give IRS collection staff an opportunity to levy such payments under its general levy authority until such time as these payments could be included in the continuous levy program. DOD and CMS have databases that could be used to provide IRS with current information concerning individuals and businesses receiving vendor payments. However, IRS has not requested such information from these agencies. According to DOD officials, a DOD Central Contractor Register currently includes information on over 160,000 vendors registered to do business with DOD, including a vendor's TIN and name, and an extract of this information could be provided periodically to IRS.Medicare contractors we spoke with stated that it may be possible to provide periodic extracts of payment data on recently paid provider claims, while CMS officials indicated that extracts from centralized agency databases, such as the National Claims History File, could also be made available to IRS. Information from each of these databases could be useful to IRS for identifying a current source against which to serve a levy under IRS' general levy authority. For example, IRS could arrange to obtain information from these agencies concerning vendors that currently receive periodic payments and when such payments are made, and if such vendors have federal tax delinquencies, work out a schedule for levying subsequent payments. As with IRS' other collection efforts, resource constraints and other collection priorities may limit the amount of delinquent taxes that IRS could recover from DOD and CMS vendors using its general levy authority. However, until all such vendor payments could be included in the continuous levy program, obtaining periodic vendor information from these agencies could enable IRS to begin collecting some portion of the delinquent taxes owed by these vendors. IRS' mission includes providing taxpayers with top quality service by applying the tax law with integrity and fairness to all. Until more types of federal payments are available, the current continuous levy program results in unequal treatment of delinquent taxpayers depending on whether their federal payments are made by FMS on behalf of other agencies or directly by the agencies themselves. Delinquent taxpayers receiving payments from FMS generally are subject to the continuous levy program; those receiving payments directly from federal agencies are not and IRS is limited to using its general levy authority in order to levy some of these non-FMS payments. Although practical issues may impede achieving similar treatment of all delinquent taxpayers receiving federal payments, progress could be made and substantial additional revenues could be collected--in fairness to those who properly pay their taxes. FMS has plans for including USPS salary and DOD salary and retirement payments in the continuous levy program. Similar plans do not exist, however, for including all vendor payments from USPS, DOD, and CMS in the continuous levy program. Discussions among FMS, IRS, and the agencies have the potential to ensure that all of these payments are included in the continuous levy program as soon as practical, and for possibly accelerating the inclusion of certain types or categories of vendor payments. Further, the effectiveness of the current continuous levy program and its expansion to other payments could be enhanced if IRS were to begin sharing the different names that businesses use for tax purposes with FMS. This would treat businesses more similarly to how IRS already handles individual taxpayers in the continuous levy program. In the interim, until the continuous levy program can be extended to more of the payments made directly by agencies, IRS' use of its existing general levy authority could be improved to better ensure that all delinquent taxpayers receiving federal payments are subject to potential collection action. DOD and CMS have available data that could be shared with IRS to increase IRS' ability to identify those taxpayers' whose federal payments could be practically and effectively levied under the general levy program. To enhance the value of agency payment data that are available for the continuous levy program, we recommend that the Commissioner of Internal Revenue provide FMS with a file of all business names that IRS has for each business taxpayer that owes federal taxes and meets the program criteria. To increase the potential for collecting delinquent federal taxes owed by federal vendors, we recommend that the Commissioner of Internal Revenue and the Commissioner of the Financial Management Service jointly initiate specific discussions with USPS, DOD, and CMS to develop plans for obtaining vendor payments from the respective agencies for the continuous levy program. The discussions should cover plans for including all of the agencies' vendor payments in the continuous levy program, as well as options for including some of their vendor payments in the program on an accelerated basis. To ensure that IRS has updated information on vendor payments to aid in identifying possible levy sources for use under its general levy authority, we recommend that the Commissioner of Internal Revenue work with DOD and CMS officials to develop the means for these agencies to periodically provide IRS with vendor information that is more current than that which IRS receives now through annual information returns. We received written comments on our draft report from the Commissioner of Internal Revenue (see app. II) and the Commissioner of the Financial Management Service (see app. III). Both the IRS and FMS Commissioners offered factual updates, clarifications, or technical comments that we have incorporated throughout this report where appropriate. The Commissioner of Internal Revenue generally agreed with our recommendations. Regarding our recommendation that the Commissioner of the Financial Management Service initiate discussions with USPS, DOD, CMS, and IRS officials to develop plans for obtaining vendor payments from the respective agencies for the continuous levy program, the Commissioner of FMS disagreed that initiating discussions with these agencies was FMS' responsibility. Rather, the Commissioner stated that it was IRS' responsibility to initiate and jointly schedule with FMS the implementation of the continuous levy program for DOD, USPS, and CMS vendor payments. The Commissioner further stated that once IRS is ready to develop this process, FMS will work with the agencies and IRS to make the necessary system changes to allow IRS to continuously levy these payments. We agree with the FMS Commissioner's view that IRS has the responsibility to participate in leading discussions for implementing the continuous levy program for vendor payments. However, because FMS is a principal component in developing the necessary processes to effectively implement continuous levies, we also believe that FMS must be equally involved in the discussions on extending the continuous levy program to vendor payments paid by agencies other than FMS. Accordingly, we modified our recommendation to state that the IRS and FMS Commissioners should jointly initiate specific discussions with USPS, DOD, and CMS for this purpose. Having been made aware of this modification to our recommendation before providing comments, the IRS Commissioner agreed in his written comments to participate with FMS in discussions with the agencies and to assist FMS in developing plans for obtaining vendor payments for inclusion in the continuous levy program. To enhance the value of agency payment data available to the continuous levy program, the Commissioner of Internal Revenue agreed to provide FMS with a file of all business names that IRS has for each business taxpayer that owes federal taxes and meets the program criteria. The Commissioner stated that a draft Request for Information Services has been submitted to begin the formal process necessary to make this change, and the change is expected to be completed by January 2003. To ensure that IRS has updated information on vendor payments to aid in identifying possible levy sources for use under its general levy authority, the Commissioner agreed to pursue the costs and benefits of securing possible levy sources from such agencies as DOD as well as pursuing more frequent levy source updates from internal IRS sources. We also received written comments from the Deputy Chief Financial Officer, Office of the Under Secretary of Defense (see app. IV), and oral comments from a representative of the United States Postal Service, in which they generally agreed with our recommendations. In addition, we received technical comments from the Acting Deputy Administrator of the Centers for Medicare & Medicaid Services, in which he stressed that CMS vendor payments could not be included in the continuous levy program until a new CMS integrated accounting system is completed. Given the substantial delinquent taxes that could potentially be recovered from CMS vendors and that CMS contractors already offset vendor payments for various other reasons, we believe that discussions between IRS, FMS, and CMS should explore whether some portion of the vendor payments could be included on an accelerated basis. As agreed with your offices, unless you announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies to the Ranking Minority Member, House Committee on Ways and Means; Ranking Minority Member, Subcommittee on Oversight; and the Chairman and Ranking Minority Member, Senate Committee on Finance. We will also send copies to the Commissioner of Internal Revenue, Commissioner of the Financial Management Service, Secretary of Defense, Administrator of the Centers for Medicare & Medicaid Services, Postmaster General, and other interested parties. Copies of this report will also be made available to others upon request. If you have any questions concerning this report, please contact Ralph Block at (415) 904-2000 or me at (202) 512-9110. Key contributors to this work are listed in appendix V. Our objectives in this report were to (1) determine the number of delinquent taxpayers receiving federal payments from the United States Postal Service (USPS), Department of Defense (DOD), and Centers for Medicare & Medicaid Services (CMS) that would be affected and the tax debt that might be recovered if they were to be included in the continuous levy program; (2) determine whether these types of payments could be included in the continuous levy program and the timeframes for doing so; and (3) identify other actions that could be taken to enhance IRS' ability to manually levy federal payments to delinquent individuals and businesses that are not currently included in the continuous levy program. To determine the number of delinquent taxpayers receiving federal payments from USPS, DOD, and CMS that would be affected and the tax debt that might be recovered if they were included in the continuous levy program, we obtained and matched IRS' accounts receivable records as of June 30, 2000, that met IRS' continuous levy program criteria with agency and contractor payment records as follows: For wage and salary payments, USPS provided payments for a biweekly pay period made on June 23, 2000; for vendor payments, USPS provided payments made during the April through June 2000 quarter. For DOD military salary, retirement, and reserve payments, the DOD Defense Manpower Data Center provided payments made for the month of June 2000; for DOD civilian salary, the DOD Defense Management Data Center provided payments made for the biweekly pay period ending July 1, 2000; for DOD vendor and contractor payments, the Defense Finance and Accounting Service provided payments made during the April through June 2000 quarter. For CMS Medicare vendor payments, Medicare contractors provided payments made during the April through June 2000 quarter. For payments that matched on both taxpayer identification number (TIN) and name, we calculated either 15 percent of the payment or the actual amount of tax owed if it was less than 15 percent of the payment to determine the amount that could be levied. All estimates of the delinquent taxes that might be recovered throughout this report have been annualized. Although some taxpayers might take actions to avoid a continuous levy, we believe our estimates of the tax debt that might be recovered are understated because we did not receive data for over 50 percent of Medicare payments made during the April through June 2000 quarter. In addition, we were unable to match about $3.4 billion in DOD vendor payments against IRS' accounts receivable data because the payment records did not contain a TIN. Based on our prior work involving the continuous levy program, we were aware that problems with information contained in vendor payment records could make such records unsuitable for matching against IRS' accounts receivable file, thus reducing the amount of tax debt that might be recovered. To identify additional debt that could be collected if problems with vendor payment records were corrected, we analyzed agency payment records to identify instances of a missing or inconsistent payee TIN or name. We selected all instances in which the TIN in the payment records matched the TIN in IRS' accounts receivable records, but the name in the payment records did not match the name in IRS' records. For these instances, we then reviewed IRS' records to determine whether it had additional information to indicate that the payee was in fact the delinquent taxpayer in question. To determine whether USPS, DOD, and CMS payments could be included in the continuous levy program and the timeframes for doing so, we interviewed IRS officials responsible for the continuous levy program. We also interviewed Financial Management Service (FMS) officials involved in recent discussions with various agencies in an attempt to include non- Treasury disbursed payments in the Treasury Offset Program. In addition, we interviewed officials from USPS, DOD, and CMS as well as selected Medicare contractors responsible for processing the various types of payments. To identify actions that could be taken to enhance IRS' ability to manually levy federal payments from delinquent individuals and businesses that are not included in the continuous levy program, we discussed this issue with IRS officials and officials from USPS, DOD, and CMS. We identified various agency databases that could be used to provide IRS with updated vendor payment sources. We also discussed IRS' current levy procedures with IRS officials, and reviewed the related tax law governing these procedures. We did our work at IRS, FMS, and USPS headquarters in Washington, D.C.; DOD headquarters in Arlington, VA; CMS headquarters in Baltimore, MD; Defense Finance and Accounting Service Centers in Columbus and Cleveland, OH, and Denver, CO; Defense Manpower Data Center in Seaside, CA; and the CMS Regional Office in San Francisco, CA. We also interviewed Medicare contractors located in Alabama, California, Florida, Maryland, New York, North Dakota, Pennsylvania, Texas, and Wisconsin. The following are GAO's comments on the Internal Revenue Service's letter dated July 16, 2001. 1. In response to IRS' concern that our text may have given the impression that IRS does not levy any federal payments that are not subject to the continuous levy program, we modified footnote 3 to recognize that IRS does levy such payments under its general levy authority. 2. IRS' suggested change has been incorporated into the text. 3. IRS' suggested change is included in footnote 10. 4. We deleted "indirect" from our text. While it is debatable whether the benefit would be direct or indirect, levy notices do sometimes result in taxpayers making other arrangements to resolve their tax liability. 5. IRS' suggested change has been incorporated into the text. 6. In response to IRS' concern with our use of the term "disparate treatment" of taxpayers in our conclusions, we have revised our text to state that whether or not taxpayers are included in the continuous levy program is predicated in part on whether their federal payments are made by FMS or directly by other agencies. We believe that this results in unequal treatment of delinquent taxpayers who receive federal payments and that this will only be corrected when more types of federal payments are available to the program. In addition to those named above, Wendy Ahmed, Tom N. Bloom, Robert C. McKay, Ellen Rominger, James J. Ungvarsky, and Elwood D. White made key contributions to this report.

The Internal Revenue Service (IRS) seeks to apply the law fairly to all taxpayers. Under the continuous levy program, however, taxpayers who receive federal payments are treated differently depending on whether the payments are made by the Federal Management Service (FMS) on behalf of other agencies or directly by the agencies themselves. Delinquent taxpayers receiving payments from FMS generally are subject to continuous levy, while those receiving payments directly from federal agencies are not. Although it may prove impractical to treat similarly all delinquent taxpayers who receive federal payments, progress--and substantial additional revenues--could be achieved in this area. FMS plans to include salaries at the U.S. Postal Service and salaries and retirement payments at the Defense Department (DOD) in the continuous levy program. There are similar plans to include all vendor payments from the Postal Service, DOD, and the Centers for Medicare and Medicaid Services. Discussions among FMS, IRS, and the agencies could ensure that all of these payments all included in the continuous levy program as soon as possible. These discussions could also speed the inclusion of some categories of vendor payments. The continuous levy program could also benefit if IRS were to begin sharing with FMS the different names that businesses use for tax purposes--an approach that IRS already uses for individual taxpayers in the program. In the meantime, until the program is expanded to include more direct payments from agencies, IRS could take steps to ensure that all delinquent taxpayers receiving payments are subject to potential collection activity. DOD and CMS have data on hand that they could share with IRS to strengthen IRS' ability to identify taxpayers whose federal payments could be levied under the program.

Top leadership in agencies across the federal government must provide committed and inspired attention needed to address human capital and related organizational transformation issues. Leaders must not only embrace reform, they must integrate the human capital function into their agencies' core planning and business activities. Senior executive leadership is especially key today as the federal government faces significant efforts to transform to address key challenges. OPM's 2008 Federal Human Capital Survey results showed that the government needs to establish a more effective leadership corps. Specifically, of the employees responding to the survey, a little over half reported a high level of respect for their senior leaders and a little less than half are satisfied with the information they receive from management on what is going on in the organization. The percentage of positive results for these questions has increased slightly since the last survey was conducted in 2006. OPM plays a key role in fostering and guiding improvements in all areas of strategic human capital management in the executive branch. As part of its key leadership role, OPM can assist in--and, as appropriate, require--the building of infrastructures within agencies needed to successfully implement and sustain human capital reforms and related initiatives. OPM can do this in part by encouraging continuous improvement and providing appropriate assistance to support agencies' efforts in areas such as acquiring, developing, and retaining talent. We have reported that OPM has made commendable efforts in transforming itself from less of a rule maker, enforcer, and independent agent to more of a consultant, toolmaker, and strategic partner in leading and supporting executive agencies' human capital management systems. However, OPM has faced challenges in its internal capacity to assist and guide agencies' readiness to implement change, such as the certification process for the senior executive performance-based pay system, and will need to address these challenges. Specifically, in October 2007, we reported that OPM has strategies in place, such as workforce and succession management plans, that are aligned with selected leading practices relevant to the agency's capacity to fulfill its strategic goals. However, at the time, OPM lacked a well-documented agencywide evaluation process of some of its workforce planning efforts. In response to our recommendation, OPM recently developed an automated tracking system to monitor training so that agency officials could target it on priority areas. OPM also faces challenges in modernizing the paper-intensive processes and antiquated information systems it uses to support the retirement of civilian federal employees through the retirement modernization program. This modernization program is important because OPM estimates a growing volume of retirement processing over the next several years given projected retirement trends. In January 2008, we reported that the agency's management of this initiative in areas that are important to successful deployment of new systems had not ensured that components would perform as intended. For example, at that point in time, OPM had not addressed weaknesses in its approaches to testing system components and managing system defects to ensure that the new system components will perform as intended. In addition, OPM had yet to develop a reliable program cost estimate and the measurement baseline against which program progress can be determined. To date, the agency continues to have retirement modernization planning and management shortcomings that need to be addressed. The results of our most recent review of the modernization program are expected to be released by the end of April 2009. To help support federal agencies with expanded responsibilities under the Recovery Act, OPM has provided information, tools, and training to federal agencies to help address these new human capital challenges and ensure that agencies acquire the talent they need. For example, in March 2009, OPM held an interagency forum on approaches to meet the Recovery Act's human capital management support requirements. At that event, OPM provided information on the various human capital flexibilities available to agencies for hiring the necessary employees, such as 30-day emergency appointments, and on how OPM can provide assistance. In addition, OPM has begun facilitating coordination with the Federal Executive Boards across the nation to share agency plans and activities for the Recovery Act implementation. Areas of coordination include shared approaches to filling human capital needs and ensuring coordination of agency programs to avoid duplication. Congress also recognized that increased attention to strategic human capital management was needed in federal agencies. In 2002, Congress created the chief human capital officer (CHCO) position in 24 agencies to advise and assist the head of the agency and other agency officials in their strategic human capital management efforts. The CHCO Council-- chaired by the OPM Director--advises and coordinates the activities of members' agencies, OPM, and the Office of Management and Budget (OMB) on such matters as the modernization of human resources systems, improved quality of human resources information, and legislation affecting human resources operations and organizations. The council, which has been in operation for nearly 6 years, has organized itself to address key current and emerging human capital issues. For example, in its fiscal year 2008 annual report to Congress, the council identified three emerging issues: (1) managing the public expectations of the federal response to highly complex issues, (2) building and sustaining federal employee leadership, and (3) transforming the human resources profession to meet challenges. Its subcommittee structure is intended to align with the overarching strategic human capital initiatives affecting the federal government and includes subcommittees on hiring and succession planning, the human capital workforce, and human resources line of business. OPM works with the CHCO Council to develop and disseminate human capital guidance and relies upon the council members to communicate OPM policy and other human capital information throughout their agencies. For example, we recently reported that inquiries from the council about how to request a waiver to rehire annuitants without reducing their salaries led OPM officials to develop a template for agencies to use in submitting these requests. OPM officials see their relationship with the council and the agencies it represents as a partnership and shared responsibility to ensure that the latest guidance and practices are disseminated throughout the agencies. In addition to the council meetings, the CHCO Council Training Academy is a forum for CHCOs and other agency officials to discuss human capital issues and share best practices. OPM has invited all levels of agency officials--not just CHCOs--to attend the academy sessions when relevant topics were featured. For example, over the last 2 years, the council has held several academy sessions related to Senior Executive Service (SES) performance management and pay systems and lessons learned from the governmentwide SES survey results. Strategic human capital planning that is integrated with broader organizational strategic planning is critical to ensuring that agencies have the talent and skill mix they need to address their current and emerging human capital challenges, especially as the federal government faces a retirement wave. Agencies must determine the critical skills and competencies necessary to achieve programmatic goals and develop strategies that are tailored to address any identified gaps. Further, agencies are to develop strategic human capital plans with goals, objectives, and measures and report their progress toward these goals and objectives in annual reports to OPM as required by OPM's Human Capital Assessment and Accountability Framework. We have found that leading organizations go beyond a succession planning approach that focuses on simply replacing individuals and instead engage in broad, integrated succession planning and management efforts that focus on strengthening both current and future organizational capacity to obtain or develop the knowledge, skills, and abilities they need to carry out their missions. For example, we recently reported on the Social Security Administration's (SSA) use of information technology in projecting future retirements and identifying the necessary steps to fill these gaps. Specifically, SSA developed a complex statistical model that uses historical data to project who is likely to retire, and SSA uses these projections to estimate gaps in mission-critical positions and to identify what components of the agency could be most affected by the upcoming retirements. With these estimates, the agency develops action plans focused on hiring, retention, and staff development. As a result of using these models, SSA has developed targeted recruitment efforts that extend to a broad pool of candidates. To create this pool, SSA is also beginning to reach out to older workers in order to achieve one of its diversity goals-- attracting a multigenerational workforce--by developing recruiting material featuring images of older and younger workers and offering a phased retirement program, among other things. An example of the federal government's strategic human capital planning challenges involves its acquisition workforce. In 2007, we testified that much of the acquisition workforce's workload and complexity of responsibilities have been increasing without adequate attention to the workforce's size, skills and knowledge, and succession planning. Over the years, a strategic approach had not been taken across government or within agencies to focus on workforce challenges, such as creating a positive image essential to successfully recruit and retain a new generation of talented acquisition professionals. In addition, we recently reported that the Department of Defense (DOD) lacks critical departmentwide information to ensure its acquisition workforce is sufficient to meet its national security mission. As a result, we made several recommendations to DOD aimed at improving DOD's management and oversight of its acquisition workforce, including the collection of data on contractor personnel. The challenges agencies are facing with managing acquisitions, including sustaining a capable and accountable acquisition workforce, contributed to GAO's designation of the management and use of interagency contracting as a governmentwide high-risk area in 2005. Further, in our most recent high-risk update, acquisition and contract management remains a high-risk area at three agencies--DOD, the Department of Energy, and the National Aeronautics and Space Administration (NASA)--as does DOD's weapon system acquisition. Addressing these challenges will require sustained management attention and leadership at both the agency level and from organizations such as OMB and its Office of Federal Procurement Policy. In May 2008, we reported that the Centers for Disease Control and Prevention (CDC) had made improvements in its strategic human capital planning, but the agency should take a more strategic view of its contractor workforce--more than one-third of its workforce. For example, CDC conducted a preliminary workforce analysis to determine the skills and competencies needed to achieve the agency's mission and goals, including identifying skill and competency gaps. While the agency had not completed its analyses of skill and competency gaps for the occupations it deemed most critical when the strategic human capital management plan was developed, at the time of our report, the agency was completing these analyses. CDC's strategic human capital management plan did not address the challenge of managing a blended workforce with a large percentage of contractors working with federal staff. We reported that without addressing this challenge CDC's plan would not give the agency a strategic view of its governmental and contractor workforce and thus might not be as useful as it could be in assisting the agency with strategic human capital planning for its entire workforce. In response to our recommendation to address this challenge in its plan, CDC's most recent update to its strategic human capital management plan includes an effort to develop, implement, and evaluate strategies to address management of contractors as part of a blended workforce. Faced with a workforce that is becoming more retirement eligible and the need for a different mix of knowledge, skills, and competencies, it is important that agencies strengthen their efforts and use of available flexibilities from Congress and OPM to acquire, develop, motivate, and retain talent. For years it has been widely recognized that the federal hiring process all too often does not meet the needs of (1) agencies in achieving their missions; (2) managers in filling positions with the right talent; and (3) applicants for a timely, efficient, transparent, and merit- based process. In short, the federal hiring process is often an impediment to the very customers it is designed to serve in that it makes it difficult for agencies and managers to obtain the right people with the right skills, and applicants can be dissuaded from public service because of the complex and lengthy procedures. In recent years, Congress and OPM have taken a series of important actions to improve recruiting and hiring in the federal sector. For example, Congress has provided agencies with enhanced authority to pay recruitment bonuses and with the authority to credit relevant private sector experience when computing annual leave amounts. In addition, Congress has provided agencies with hiring flexibilities that (1) permit agencies to appoint individuals to positions through a streamlined hiring process where there is a severe shortage of qualified candidates or a critical hiring need, and (2) allow agency managers more latitude in selecting among qualified candidates through category rating. As the federal government's central personnel management agency, OPM has a key role in helping agencies acquire, develop, retain, and manage their human capital. In the areas of recruiting and hiring, OPM has, for example, done the following. Authorized governmentwide direct-hire authority for veterinarian medical officer positions given the severe shortage of candidates for these positions. Recently, we reported that despite a growing shortage of veterinarians, the federal government does not have a comprehensive understanding of the sufficiency of its veterinarian workforce for routine program activities. In response to our findings, OPM granted direct-hire authority for these positions governmentwide. Launched an 80-day hiring model to help speed up the hiring process, issued guidance on the use of hiring authorities and flexibilities, and developed a Hiring Tool Kit to assist agency officials in determining the appropriate hiring flexibilities to use given their specific situations. Established standardized vacancy announcement templates for common occupations, such as secretarial, accounting, and accounting technician positions, in which agencies can insert summary information concerning their specific jobs prior to posting for public announcement. Developed a guide called Career Patterns that is intended to help agencies recruit a diverse, multigenerational workforce. This guide presents career pattern scenarios that characterize segments of the general labor market according to career-related factors, such as commitment to a mission and experience, and lists characteristics of the work environment that some cohorts may find particularly attractive and related human capital policies that agencies could use to recruit and retain potential employees. Updated and expanded its report Human Resources Flexibilities and Authorities in the Federal Government, which serves as a handbook for agencies in identifying current flexibilities and authorities and how they can be used to address human capital challenges. Individual federal agencies have also taken actions to meet their specific needs for acquiring the necessary talent, while other agencies have faced difficulties. For example, NASA has used a combination of techniques to recruit workers with critical skills, including targeted recruitment activities, educational outreach programs, improved compensation and benefits packages, professional development programs, and streamlined hiring authorities. Many of NASA's external hires have been for entry- level positions through the Cooperative Education Program, which provides NASA centers with the opportunity to develop and train future employees and assess the abilities of potential employees before making them permanent job offers. Further, the Nuclear Regulatory Commission (NRC) has endeavored to align its human capital planning framework with its strategic goals and identified the activities needed to achieve a diverse, skilled workforce and an infrastructure that supports the agency's mission and goals. NRC has used various flexibilities in recruiting and hiring new employees, and it has tracked the frequency and cost associated with the use of some flexibilities. While there was room for further improvement, NRC has been effective in recruiting, developing, and retaining a critically skilled workforce. We have reported in recent years on a number of human capital issues that have hampered the Department of State's (State) ability to carry out U.S. foreign policy priorities and objectives, particularly at posts central to the war on terror. In August 2007, we testified that State has made progress in addressing staffing shortages over the last few years, but it remains a problem. To help address the shortages, State has implemented various incentives particularly at critical hardship posts, including offering extra pay to officers who serve an additional year at these posts and allowing employees to negotiate shorter tours of duty. Further, State has made progress in increasing its foreign language capabilities, but significant language gaps remain. In response to our recommendations to enhance the language proficiency of State's staff, officials told us that the department has placed an increased focus on language training in critical areas. State has also implemented a new initiative that would provide additional pay incentives for staff if they chose to be reassigned to use existing Arabic language skills. The Partnership for Public Service (Partnership) recently reported that governmentwide, agencies were not using the student intern hiring flexibility to the full extent possible. Governmentwide, agencies have the authority to hire student interns through the Student Career Experience Program with the option of a noncompetitive conversion to the competitive service upon a student's satisfactory completion of diploma, degree, or certificate of program requirements and work experience. In its recent interagency forum on human capital management under the Recovery Act, OPM highlighted this hiring flexibility as a useful tool for bringing potential employees on board. The Partnership found that about 7 percent of student interns employed by federal agencies in 2007 were hired into permanent jobs. The Partnership suggested that the federal government should, among other things, prioritize student internships as key talent sources for entry-level jobs and then recruit accordingly and provide adequate resource to these programs; and collect data enabling a clear evaluation of all intern programs and ensure that agencies are making the best use of their authority to build their critical workforce pipelines. Further, agencies have a variety of options to tap older, experienced workers to fill workforce needs, including retaining workers past initial retirement eligibility, hiring new older workers, and bringing back retired federal annuitants. Recently, we reported on selected federal agencies' approaches to using older workers to address future critical gaps in leadership, skills, and institutional knowledge. For example, the United States Agency for International Development tends to bring back its retirees, many of whom have specialized knowledge and skills, as contractors to fill short-term job assignments and to help train and develop the agency's growing number of newly hired staff. As for retention, in many ways, the federal government is well positioned to retain the people it needs to carry out its diverse roles and responsibilities. Importantly, federal employment offers rewards, such as interesting work and opportunities to make a difference in the lives of others, as well as a variety of tangible benefits and work-life flexibilities that make an organization an employer of choice. We have stated that agencies need to reexamine the flexibilities provided to them under current authorities--such as monetary recruitment and retention incentives; special hiring authorities, including student employment programs; and work-life programs, including alternative work schedules, child care assistance, telework opportunities, and transit subsidies--and identify those that could be used more extensively or more effectively to meet their workforce needs. In using telework and other flexibilities, it is important for agencies to have clear goals so that they can assess their programs and develop and implement changes necessary to improve their success. We have found instances where agency officials cited their telework programs as yielding positive work-life and other benefits. For example, according to U.S. Patent and Trademark Office (USPTO) management officials, one of the three most effective retention incentives and flexibilities is the opportunity 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 per week. In addition, USPTO reported in June 2007 that approximately 910 patent examiners relinquished their office space to work from home 4 days per week. The agency believes its decision to incorporate telework as a corporate business strategy and for human capital flexibility will help recruitment and retention of its workforce, reduce traffic congestion in the national capital region, and, in a very competitive job market, enable USPTO to hire approximately 6,000 new patent examiners over the next 5 years. Leading organizations have found that to successfully transform themselves they must often fundamentally change their cultures so that they are more results-oriented, customer-focused, and collaborative in nature. An effective performance management system is critical to achieving this cultural transformation. Having a performance management system that creates a "line of sight" showing how unit and individual performance can contribute to overall organizational goals helps individuals understand the connection between their daily activities and the organization's success. Similarly, in its September 2008 report on employee engagement, the Merit Systems Protection Board recommended that managers establish a clear line of employee-to-agency sight as a means to increase employee engagement, recognizing that employees are more engaged if they find more meaning in their work. The federal government's senior executives need to lead the way in transforming their agencies' cultures. Credible performance management systems that align individual, team, and unit performance with organizational results can help manage and direct this process. The performance-based pay system for members of the SES, which seeks to provide a clear and direct linkage between individual performance and organizational results as well as pay, is an important step in governmentwide transformation. In November 2008, we reported that selected agencies had designed their SES performance appraisal systems to address OPM's and OMB's certification requirements of aligning individual performance expectations with organizational goals and factoring organizational performance into senior executive performance appraisal decisions. For example, in setting expectations for individual performance plans, the Department of Energy requires senior executives and supervisors to identify key performance requirements with metrics that the executive must accomplish in order for the agency to achieve its strategic goals. Weighted at 60 percent of the summary rating, the performance requirements are to be specific to the executive's position and described in terms of specific results with clear, credible measures (e.g., quality, quantity, timeliness, cost-effectiveness) of performance, rather than activities. For each performance requirement, the executive is to identify the applicable strategic goal in the performance plan. While many agencies across the government are doing a good job overall of aligning executive performance plans with agency mission and goals, according to OPM, some of the plans do not fully identify the measures used to determine whether the executive is achieving the necessary results, which can affect the executive's overall performance appraisal. This challenge of explicitly linking senior executive expectations to results-oriented organizational goals is consistent with findings from our past work on performance management. In addition to promoting high performance and accountability to foster results-oriented cultures, leading organizations develop and maintain inclusive and diverse workforces that reflect all segments of society. Such organizations typically foster a work environment in which people are enabled and motivated to contribute to continuous learning and improvement as well as mission accomplishment and provide both accountability and fairness for all employees. As with any organizational change effort, having a diverse top leadership corps is an organizational strength that can bring a wider variety of perspectives and approaches to bear on policy development and implementation, strategic planning, problem solving, and decision making. We recently reported on the diversity of the SES and the SES developmental pool, from which most SES candidates are selected, noting that the representation of women and minorities in the SES increased governmentwide from October 2000 through September 2007, but increases did not occur in all major executive branch agencies. In helping to ensure diversity in the pipeline for appointments to the SES as well as recruitment at all levels, it is important that agencies have strategies to identify and develop a diverse pool of talent for selecting the agencies' potential future leaders and to reach out to a diverse pool of talent when recruiting. For example, to recruit diverse applicants, agencies will need to consider active recruitment strategies such as widening the selection of schools from which to recruit, building formal relationships with targeted schools to ensure the cultivation of talent for future applicant pools, and partnering with multicultural organizations to communicate their commitment to diversity and to build, strengthen, and maintain relationships. We reported, for example, that NASA developed a strategy for recruiting Hispanics that focuses on increasing educational attainment, beginning in kindergarten and continuing into college and graduate school, with the goal of attracting students into the NASA workforce and aerospace community. NASA said it must compete with the private sector for the pool of Hispanics qualified for aerospace engineering positions, which is often attracted to more lucrative employment opportunities in the private sector in more preferable locations. NASA centers sponsored, and its employees participated in, mentoring, tutoring, and other programs to encourage Hispanic and other students to pursue careers in science, engineering, technology, and mathematics. Mr. Chairman and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions you or others may have at this time. For further information regarding this statement, please contact Yvonne D. Jones, Director, Strategic Issues, at (202) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Belva Martin, Assistant Director; Karin Fangman; Janice Latimer; and Jessica Thomsen. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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In 2001, GAO identified human capital management as a governmentwide high-risk area because federal agencies lacked a strategic approach to human capital management that integrated human capital efforts with their missions and program goals. Progress has been made. However, the area remains high-risk because of a continuing need for a governmentwide framework to advance human capital reform. The importance of a top-notch federal workforce cannot be overstated. The federal government is facing new and growing challenges coupled with a retirement wave and the loss of leadership and institutional knowledge at all levels. The issues facing agencies are complex and require a broad range of technical skills that are also highly sought after by the private sector. This testimony, based on a large body of completed work issued from January 2001 through March 2009, focuses on executive branch agencies' and the Office of Personnel Management's (OPM) progress in addressing strategic human capital management challenges in four key areas: (1) leadership; (2) strategic human capital planning; (3) acquiring, developing, and retaining talent; and (4) results-oriented organizational culture. In prior reports, GAO has made a range of recommendations to OPM and agencies in the four areas. GAO is reporting on progress in addressing these recommendations and is making no new recommendations. Congress, executive branch agencies, and OPM have taken action to reform federal human capital management, but federal agencies are facing new challenges. The recent need to quickly hire staff to carry out and oversee the Troubled Asset Relief Program and expanded agency responsibilities under the American Recovery and Reinvestment Act of 2009 point to the need for sustained attention to help ensure that agencies have the right people with the right skills to meet new challenges. Top leadership in agencies across the federal government must provide committed and inspired attention needed to address human capital and related organizational transformation issues. OPM has made strides in transforming itself as a strategic partner to help lead human capital reform efforts. For example, at the agency level, OPM works with the Chief Human Capital Officers council to develop and disseminate human capital guidance and relies upon the council members to communicate OPM policy and other human capital information throughout their agencies. Integrating succession planning and management efforts that focus on strengthening both current and future organizational capacity to obtain or develop the knowledge, skills, and abilities agencies need to meet their missions continues to be important. For example, GAO has reported on a challenge in the acquisition workforce where the workload and complexity of responsibilities have been increasing without adequate attention to the workforce's size, skills and knowledge, and succession planning. Faced with a workforce that is becoming more retirement eligible and the need for a different mix of knowledge, skills, and competencies, it is important that agencies strengthen their efforts and use available flexibilities. Agencies have developed strategies to recruit needed talent, including turning to older experienced workers to fill knowledge and skills gaps. For example, the National Aeronautics and Space Administration has used a combination of techniques to recruit workers with critical skills, including targeted recruitment activities, educational outreach programs, improved compensation and benefits packages, and streamlined hiring authorities. In addition to promoting high performance and accountability to foster results-oriented cultures, it is important for agencies to develop and maintain inclusive and diverse workforces that reflect all segments of society. Agencies can benefit from strategies that offer a diverse pool of talent for selecting the agencies' future leaders and recruiting new employees so that agencies can get a wider variety of perspectives and approaches.

FDA is responsible for helping to ensure the safety and efficacy of drugs marketed in the United States. It does this by overseeing the drug development process, reviewing applications for the marketing of new drugs, and monitoring the safety and efficacy of drugs once they are marketed. A growing body of literature has demonstrated that in responses to some drugs there are medically important sex differences that require the participation of women in clinical trials for new drugs. In the 1970s, FDA recommended the exclusion of women of childbearing potential from early clinical drug trials because of concerns for the health of the women and of their potential offspring. FDA, an agency in the Department of Health and Human Services, is charged with helping to ensure that safe and effective food, drugs, medical devices, and cosmetics reach the United States market. FDA assists drug manufacturers in designing clinical drug trials, reviews proposals for conducting clinical drug trials, and approves drugs for sale in the United States based on its determination that the clinical benefits of a drug outweigh its potential health risks. FDA also approves drug labeling, which indicates the medical conditions and patient populations for which the drug has been tested and approved as safe and effective. Once a drug reaches the market, FDA continues to monitor its safety and efficacy. Before any new drug can be tested on humans, a drug's sponsor must submit an investigational new drug (IND) application to FDA that summarizes the investigations conducted prior to trials in humans, lays out a plan for how the drug will be tested in humans, and provides assurances that appropriate measures will be taken to protect study participants. Specifically, the IND application demonstrates that the drug is reasonably safe for subsequent testing in humans based on laboratory and animal testing and exhibits enough potential effectiveness to justify its commercial development. Unless FDA determines that a proposed study is unsafe, clinical testing may begin 31 days after the IND application is submitted to FDA. The sponsor then proceeds with the three main stages of clinical drug testing: Phase 1 small-scale safety trials generally study small numbers of healthy volunteers to determine toxicity and safe dosing levels. These trials also study a drug's pharmacokinetics, or how it is absorbed, distributed, metabolized, and excreted, and its concentration in the bloodstream; Phase 2 small-scale efficacy trials generally study patient volunteers with the disease or condition against a comparison group to assess drug efficacy and side effects; and Phase 3 full-scale safety and efficacy trials study thousands of patient volunteers against a comparison group to further evaluate efficacy and monitor adverse responses to the drug. Drugs for life-threatening diseases for which there is no other effective course of treatment sometimes cannot be compared against another treatment and will sometimes use historical information about patient outcomes as a point of comparison. Drug sponsors are required to submit IND annual reports to FDA during the typically 2- to 10-year span of the clinical drug trials. When the sponsor wants to market a new drug, it submits a new drug application (NDA). FDA regulations on NDA content and format require that the NDA include integrated summaries of the evidence demonstrating the drug's safety, including adverse events suffered by those in the clinical drug trials, and effectiveness. Evidence is also required to support the dosing section of the labeling, including the recommended dose and modifications in dose for specific population subgroups. Each NDA must include at least one pivotal clinical trial, generally an "adequate and well-controlled" Phase 3 study that demonstrates the drug's efficacy, or effectiveness. There are many examples in the medical literature of sex differences in the way men and women absorb, distribute, and metabolize drugs. The effects of women's hormones and the variations in body size between men and women are the likely causes of many sex differences in responses to drugs. Women metabolize some drugs differently if they are pregnant, lactating, pre- or postmenopausal, menstruating, or using oral contraceptives or hormone replacements. Women's generally smaller body weight compared to men can result in higher levels of drug concentration in the bloodstream. These and other established physiological and anatomical differences may make women differentially more susceptible to some drug-related health risks and demonstrate the importance of including women in all stages of drug development. For example, phenylpropanolamine (PPA), a common ingredient in over-the-counter (OTC) and prescription cough and cold medications and OTC weight-loss products, was found to increase the risk of bleeding into the brain or tissue around the brain in women, but not in men. Certain classes of drugs can in some circumstances prolong the interval between the heart muscle's contractions and induce a potentially fatal cardiac arrhythmia. Women have a higher incremental risk of suffering such an arrhythmia after taking these drugs than do men, probably because (1) the interval between heart muscle contractions is naturally longer for women than for men and (2) male sex hormones moderate the heart muscle's sensitivity to these drugs. We recently reported that four of the ten prescription drugs withdrawn from the U.S. market in the last 3 years posed a greater health risk to women than to men because they induced arrhythmia. Similarly, there is evidence that not all drugs are effective in both sexes. For example, one class of painkillers, kappa opioids, has been found to be twice as effective in women as in men. Discoveries of birth defects and other problems resulting from fetal exposure to certain drugs between the 1940s and early 1970s prompted societal interest in protecting women and their fetuses from the potentially devastating effects of clinical drug research. For example, diethylstilbestrol (DES) was taken by women in the 1940s and 1950s to protect against miscarriages. About 20 years later, many daughters of women who had taken the drug developed reproductive abnormalities and had an increased risk of developing vaginal cancer. Similarly, in the 1960s many women outside of the United States took thalidomide to prevent early miscarriages, and the drug caused over 10,000 birth defects worldwide. In 1977, partially in response to the thalidomide scare, FDA recommended that women of childbearing potential be excluded from participating in small-scale safety and efficacy trials unless the drug was intended to treat a life-threatening disease. As a result, women were typically excluded from these clinical drug trials. Through the next decade there were growing concerns that the 1977 guideline may have restricted the early accumulation of information about women's responses to drugs that could be used in designing later clinical drug trials and that it stifled the production and analysis of data on the effects of drugs in women. In 1994, the Institute of Medicine (IOM) reported that the FDA guidance that discouraged the participation of women of childbearing potential in initial small-scale trials led to the widespread exclusion of women in later large scale trials. In addition, analyses of published clinical drug trials for life-threatening conditions have concluded that many past clinical trials included few or no women, making it uncertain whether the studies' results applied to women. These conditions include cardiovascular disease and HIV. This report is our second to address FDA and women in clinical drug trials. In 1992, we investigated FDA's policies and the pharmaceutical industry's practices regarding research on women in clinical drug trials. We reported that women were generally underrepresented in clinical drug trials in comparison to the proportion of women among those persons with the disease for which the drug was intended and that sex-related analyses were not routinely conducted. Even so, there were enough women in most clinical drug trials to detect sex differences in men and women's response to drugs. FDA has conducted its own studies on the inclusion of women in clinical drug trials. Surveys of NDAs in 1983 and 1988 found that, in general, both sexes were represented in clinical drug trials in proportions that usually reflected the prevalence of the disease in the total population but were not necessarily statistically sufficient to prove the safety or efficacy of the drug for either sex. Despite the participation of women, few analyses of the data were being conducted to detect possible sex differences in drug safety or efficacy. FDA has also looked at the tabulation of demographic data in IND annual reports. FDA recently reported that in IND annual reports filed with the agency women made up 44 percent of participants in clinical drug trials in which sex was identified. However, the FDA researchers found that sex could not be determined for more than one half of the participants in the IND annual reports. FDA has addressed women in clinical drug trials through the publication of guidance in 1993 and regulations in 1998 and 2000. The 1993 guidance for the pharmaceutical industry recommends that clinical studies include men and women "in numbers adequate to allow the detection of clinically significant gender differences in drug response" and that analyses of sex differences be included in NDAs. The 1998 regulation is less specific. It does not include references to how the number of women to be included in clinical drug trials should be determined. It requires only that safety and efficacy data already collected be presented separately for men and women in NDAs, but it does not require any discussion or analysis of these data. The 1998 regulation also requires the tabulation of study participants by sex in IND annual reports. The regulations issued in 2000 allow FDA to temporarily halt research programs for drugs for life-threatening conditions if men and women with reproductive potential are excluded from participation in ongoing studies. In response to our 1992 report, FDA issued policy guidance in 1993 regarding women in clinical drug trials, explicitly reversing its 1977 recommendation to restrict some women's participation in drug development. Its 1993 Guideline for the Study and Evaluation of Gender Differences in the Clinical Evaluation of Drugs recommended that clinical drug trials should, in general, reflect the population that will receive the drug when it is marketed. This guidance also advised that enough men and women be included in clinical drug trials to allow for the detection of clinically significant sex differences in drug response, including those differences attributable to hormones and body weight variations. On August 10, 1998, FDA implemented regulations amending requirements for INDs and NDAs to include demographic data. The regulation requires sponsors to tabulate the sex, age, and race of study participants in IND annual reports and to present available safety and efficacy data by sex, age, and race in two NDA documents submitted to FDA: the Integrated Summary of Safety and the Integrated Summary of Efficacy. The regulation also requires that evidence be presented to support dose determinations. FDA has the authority under these regulations to refuse to accept, or "file," any NDA for review that does not include this information. In addition, FDA promulgated regulations on June 1, 2000, allowing it to halt IND studies involving drugs that are intended to treat life-threatening diseases or conditions if men or women of reproductive potential are excluded from participation solely because of risks to their reproductive potential. This regulation does not, however, impose requirements to recruit or enroll a specific number of men or women with reproductive potential, and FDA has not halted any studies under this authority. We did not evaluate whether FDA should have invoked this rule. The language of the 1998 demographic regulation is less specific than the 1993 guidance. The 1998 regulation has the force and effect of law, while the 1993 guidance does not legally bind either FDA or drug sponsors. The 1993 guidance specifically discusses the need to analyze clinical data by sex, evaluate potential sex differences in pharmacokinetics, including those caused by body weight, and conduct specific additional studies in women, where clinically indicated. The 1998 regulation requires the presentation of safety and efficacy data already collected in the NDA by sex, but no analysis of such data is required. The regulation does not include a standard for the inclusion of women; it requires only "presentation of data" without clarifying the extent of data or the format to be used. The regulation does require the identification of any modifications in dose or dose interval because of sex, age, or race, but not weight. We found that the NDA summary documents and IND annual reports submitted to FDA by drug sponsors frequently did not present information already collected during drug development separately for men and women, as required by the 1998 regulation. We found that 33 percent of the NDAs in our sample did not include presentations of both safety and efficacy outcome data separately for men and women. Similarly, we found that 39 percent of the IND annual reports in our sample did not include the required information about the sex of study participants. One-third of the NDAs we examined did not include presentations for men and women of both safety data in the Integrated Summary of Safety and of efficacy data in the Integrated Summary of Efficacy. We considered the presentation of outcome data by sex in an NDA for just one of the studies included in that NDA to meet our criteria for regulatory compliance. Safety outcome data by sex, either data about toxicity or adverse events or both, were not included in 17 percent of the NDAs we reviewed. Similarly, 22 percent of the NDAs did not present efficacy outcome data separately for men and women. We found that 39 percent of the IND annual reports in our sample did not include the demographic information required by regulation: 15 percent of the annual reports were not submitted to FDA and 24 percent did not tabulate the number of men and women enrolled in clinical drug trial studies. Only 37 percent of the annual reports tabulated the enrolled study populations by sex, as required by the 1998 regulations; 24 percent of the annual reports stated that there were no ongoing studies. All of the NDAs we examined included enough women in the pivotal trials to demonstrate statistically that the drug was effective in women, even if the sponsors did not report such an analysis or did not include the required presentation of outcome data in the NDAs. Overall, more women than men participated in clinical trials for the drugs we examined, although women were a minority of the participants in the initial, small- scale safety studies used to set the dosing levels for subsequent trials. We found that most of the NDAs included analyses to detect differences between men and women, but fewer of the NDAs explicitly included descriptions of both safety and efficacy analyses that compared women taking the drug with a comparison group of women taking a placebo or an alternative treatment. Analyses often detected sex differences. The sex differences that were detected were sometimes attributed to differences in body weight between men and women; none of the sex differences that were detected were judged to be clinically relevant, even when statistically significant. The NDA sponsors did not recommend different dosage levels for men and women based on the sex differences they detected. All of the NDAs in our sample included enough women in the pivotal trials to demonstrate statistically that the drug was effective in women; that is, the numbers of women in the treatment and comparison groups of the pivotal studies were sufficient to detect a statistically significant difference between the treatment and comparison groups, given the magnitude of symptom improvement experienced by the treatment group. However, one drug was approved for use in men even though the NDA reported that no men participated in the pivotal studies. We did not attempt to demonstrate statistically that the drugs in our sample were safe for women, because there are no absolute standards for the number of required study participants for assessing drug safety. Generally, the more patients that are exposed to a drug during its development, the more likely that significant adverse events will be detected. Safety determinations are largely based on adverse events reported for all participants in all studies. Since more women than men were included in clinical trials for the NDAs we examined, the adverse event data gathered for women were at least as extensive as the adverse event data gathered for men. A larger percentage of participants in clinical drug trials are women than we found in our 1992 analysis of trials performed between 1988 and 1992. Adjusting for differences in the classes of drugs included in the studies, we found that the percentage of women participants in small-scale efficacy and full-scale safety and efficacy trials increased from 44 percent in our 1992 study to 56 percent in the NDAs we examined. In the current study, summing across all the clinical trials for all of the NDAs we examined, 52 percent of the study participants were women, 39 percent were men, and 9 percent were not identified by sex. When participants' sex was identified, women were the majority of participants for 58 percent of the NDAs. Women made up more than one-half of all the participants in small-scale efficacy and full-scale safety and efficacy trials. However, women were 22 percent of the participants in the initial, small-scale safety studies. One of the NDAs included no women in the early safety trials. These early safety studies are important because they measure how participants absorb, metabolize, and excrete a drug, and their findings are used to help set the dosage amounts for subsequent trials. NDAs usually contained sex-related analyses of safety and efficacy, regardless of whether the outcome data were presented in the summary documents as required by regulation (see table 1). Evidence of these analyses ranged from one-line summaries stating that there were no sex differences, to more complete, multi-page tables and descriptions of statistical methods and results. Specifically, most NDAs included analyses of safety and efficacy outcome data to detect differences between men and women in their responses to drugs. NDAs were less likely to include discussions of analyses of the safety and efficacy of drugs in women specifically by comparing women who received the drug and a comparison group of women. Fewer NDAs included analyses of pharmacokinetic data by sex, even though analysis of pharmacokinetic data is explicitly recommended in the 1993 guidance. We found that 42 percent of NDAs presented outcome data for these early studies for both men and women. Seventy-five percent of the NDAs we reviewed had some evidence of an analysis of pharmacokinetic data for sex differences. Many of the NDAs we reviewed reported differences in men and women's responses to drugs, but fewer reported these differences to be statistically significant (see table 2). For example, while one-half of the NDAs reported drug safety differences between men and women, less than one-fifth of the NDAs reported statistically significant sex differences in drug safety. We found no evidence that any of the sex differences reported in any NDA on any dimension--safety, efficacy, or pharmacokinetics--even when statistically significant, were judged to be clinically relevant by either the NDA sponsors or the FDA reviewers, and no dose adjustments based on sex were recommended. Some NDA sponsors also reported differences in either safety or efficacy between women receiving the drug and women in a comparison group (see table 3). About one-fifth of the NDAs reported statistically significant differences in safety between women taking the drug and a comparison group, and about one-half found statistically significant differences in efficacy. Apparent sex differences in pharmacokinetics, and sometimes safety and efficacy, may be due to differences in weight between the sexes instead of other biological differences. At a constant dosage, individuals who weigh less have a higher exposure to the drug than heavier individuals, and, on average, women weigh less than men. The potential for higher drug concentration or exposure can lead to an increased risk of adverse events for women. In our sample of NDAs, 36 percent reported pharmacokinetic differences based on weight, whether or not sex differences were also reported. Twenty-five percent of NDAs reported apparent sex differences in drug response between men and women that were attributed to weight, not sex. In these cases, the sponsors reported sex differences in drug response but then noted that the differences disappeared when weight was taken into account. In all of these cases of weight-related differences in men and women's responses to drugs, the sponsors asserted that no dose adjustments were necessary based on sex. For two intravenously administered drugs and one injectable drug the NDA did indicate dose adjustments based on weight for all patients. FDA has not effectively overseen the presentation and analysis of data related to sex differences in drug development. There is no management system in place to record and track the inclusion of women in clinical drug trials or to monitor compliance with relevant regulations, so FDA is unaware that many NDA submissions fail to meet requirements. The agency also does not routinely review the required tabulation of demographic data by sex in the IND annual reports for drugs in development. Finally, FDA's medical officers have not been required to discuss sex differences in their reviews, and we found that their reviews frequently did not address the results of sex-related analyses conducted by NDA sponsors. Until recently, FDA has also lacked procedures to determine whether the reviews of its medical officers adequately discuss sex differences. We did not find, nor did we look for, any evidence that FDA's reviews of the NDAs we examined had negative public health consequences. Such an examination was beyond the scope of this study. Recently, FDA has taken steps to pilot test several initiatives to address these management needs. FDA does not know how many women are included in clinical trials for each NDA or if NDA summary documents comply with the data presentation requirements of the 1998 regulation. There has been no systematic attempt by FDA to routinely collect and organize data on the inclusion of women in clinical trials. Although FDA officials told us that they believe that regulatory requirements are being met, FDA has no system in place to provide information that would support that assertion. The agency has not routinely tracked the required presentation of safety and efficacy data from women participating in clinical trials for the drugs it reviews. FDA does not routinely review the required presentation of data about the sex of study participants in the IND annual reports. As we noted earlier, 39 percent of the required IND annual reports did not include the tabulation of demographic information about study participants mandated by the 1998 regulation. We found no evidence that FDA follows up with sponsors that have not submitted annual reports--about 15 percent in our sample. A senior FDA official told us that the agency does not rely upon the information in these reports to monitor pre-NDA drug testing. According to this official, the agency instead uses other reports submitted by the sponsors for which there are no regulatory requirements to tabulate clinical trial participants by sex. FDA's Medical Officer Reviews are important documents that detail FDA's evaluation of the safety and efficacy of new drugs. We found that FDA's medical officers have not been required to address sex differences in their reviews, and many of the medical officers' reviews we examined did not address the sex-related data and analyses included in the NDAs (see table 4). For example, FDA's medical officers did not discuss in their written reviews why reported differences between men and women in their responses to drugs did not require dose adjustments. In some cases, apparent contradictions in the NDAs about the role of sex or weight within the text of a drug application were not addressed. Since December 2000, FDA has pursued several initiatives that directly address areas of concern related to the review of sex differences. First, to help track the number of women in clinical trials and to monitor the compliance of NDAs with data reporting regulations, FDA began pilot testing a worksheet for reviewers to capture demographic information about the participants in large-scale efficacy trials. Instructions for the worksheet that will allow it to be used by all of FDA's reviewers are being developed. Second, to help ensure that its medical officers address sex differences, FDA began pilot testing a standardized template for Medical Officer Reviews. The template instructs medical officers to discuss sex- related issues in a standard format in all of their reviews. Third, an electronic training package was recently implemented to provide information to FDA's medical reviewers on the guidance and regulations applicable to the review of sex-related data and analyses included in NDAs. However, FDA does not require reviewers to use the training package. We found that women were a majority of the clinical trial participants in the NDAs we examined and that every NDA included enough women in the pivotal studies to be able to demonstrate statistically that the drug is effective in women. While these findings are welcome, we also found three areas of concern. The first is the relatively small proportion of women in early small-scale safety studies. These early studies provide important information on a drug's toxicity and safe dosing levels for later stages of clinical development, and many of the NDAs we examined found significant sex differences in a drug's pharmacokinetics, or how it is absorbed, distributed, metabolized, excreted, and concentrated in the bloodstream. Second, we are not confident that either NDA sponsors or FDA's reviewers took full advantage of the available data to learn more about the effects of the drug in women and to explore potential sex differences in dosing. This is because NDA summary documents are not required to include analyses of sex differences, and some of them do not. Similarly, FDA's medical officers have not been required to discuss sex differences in their reviews, and many of the reviews we examined did not include complete discussions of potential sex differences. Third, FDA does not now have appropriate management systems to monitor how many women are in clinical trials, to be assured that NDAs and IND annual reports are in compliance with pertinent regulations for presenting outcome data by sex and tabulating the number of women included in ongoing trials, or to confirm that its medical officers have adequately addressed sex-related issues in their reviews. While FDA has taken some promising initial steps to address these deficiencies, it is important that the agency finalize the pilot programs it has underway and give sustained attention to these management issues. We recommend that FDA adopt management tools that will ensure drug sponsors' compliance with current regulations regarding the presentation of data by sex and that its reviewers' consistently and systematically discuss sex differences in their written reviews of NDAs. Specifically, we recommend that the Acting Principal Deputy Commissioner of FDA: Promptly implement management tools, such as the proposed demographic worksheet and the standardized template for Medical Officer Reviews, that will allow the agency to determine whether NDAs and IND annual reports are in compliance with regulations that mandate the presentation of available safety and efficacy outcome data for women in NDAs and the tabulation of study participants by sex in IND annual reports. Fully implement the proposed template for Medical Officer Reviews or take other actions to ensure that FDA's medical officers consistently and systematically consider and discuss sex differences in their written reviews of NDAs. We received written comments from FDA on a draft of this report (see appendix III). FDA generally agreed with our findings. FDA did not comment on our recommendations, but outlined additional steps it may take to monitor the inclusion of women in clinical trials. FDA questioned our description of comparisons between men and women, and comparisons between women taking the drug and a comparison group of women, as two distinct types of analyses. FDA pointed out that an analysis of sex differences implies that an analysis of the drug's efficacy in women has been completed because an analysis of sex differences is a comparison of the drug's efficacy in men and women. We have clarified the text, but we continue to present information about both analyses in order to accurately reflect the contents of the NDA summary documents we reviewed. Finally, FDA pointed out that its efforts to improve its management in this area have been underway for some time. In response, we modified our description of FDA's activities. FDA also made additional technical comments that we have incorporated where appropriate. As we arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after its issue date. At that time, we will send copies of this report to the Acting Principal Deputy Commissioner of FDA and to others who request them. If you or your staff have any questions, please contact me at (202) 512- 7119. Another contact and major contributors to this report are listed in appendix IV. Our work addressed four questions: (1) what FDA regulations govern the inclusion of women in clinical drug trials; (2) are the regulations being followed; (3) are appropriate numbers of women included in clinical drug trials to ensure the safety and efficacy of drugs for women; and (4) how does FDA oversee the collection, presentation, and analysis of data related to sex differences? Our work did not include an examination of post marketing adverse events or negative public health consequences. To assess FDA's oversight of the collection, presentation, and analysis of data related to sex, we reviewed the FDA Medical Officer Reviews for all sampled NDAs. We also interviewed officials in FDA's Center for Drug Evaluation and Research, the Office of Special Health Issues, and the Office of Women's Health. We also interviewed officials from drug companies and an industry trade association. To gain background knowledge on the issues related to our work, we spoke with women's health advocates and consulted pharmacology experts. We conducted a literature review that included relevant FDA guidance and regulations, FDA and IOM reports, medical journal articles, prescription drug labels, and consumer advocacy publications. Because FDA maintains no central source of data on the inclusion of women in clinical drug trials, we sampled NDAs for new molecular entities (NME) submitted to FDA from August 10, 1998 through December 31, 2000. Of the 82 original NDAs for NMEs submitted to FDA during this period, we examined all 36 that were either approved for marketing or judged approvable by FDA by December 31, 2000, and that met our other selection criteria. We narrowed our focus to only approved and approvable NDAs because these drugs are the most likely to reach the public. We excluded diagnostic drugs used in medical imaging, drugs for sex-specific conditions, pediatric drugs, and drugs that were not approved for use in both men and women. We also did not examine biologic products, such as vaccines. As a result of our sampling criteria, the clinical drug trials for some drug classes that have been cited by experts as including insufficient numbers of women were not well represented. For example, our sample included only one cardiovascular drug. We requested from FDA and reviewed critical summary documents for each NDA, including the Integrated Summary of Safety, the Integrated Summary of Efficacy, the Pharmacokinetics and Bioavailability Summary, and the FDA Medical Officer Review. We obtained and reviewed other NDA documents only when the summary documents referred to relevant information. We reviewed the NDA summary documents because the 1998 regulations specifically require NDA sponsors to present data about drug safety and efficacy in the Integrated Summary of Safety and the Integrated Summary of Efficacy and because we were unable to review all of the documents in each NDA (an entire NDA can contain as many as 250 volumes). Our findings speak only to what was included in the summary documents or in the supplemental documents we examined; we did not systematically review other relevant data, such as data in clinical pharmacology reviews, that may have been presented in NDA volumes other than the critical summary documents. In our reviews of the critical summary documents we collected data on (1) the presentation of outcome data by sex, (2) the number of women participating in clinical drug trials by drug development stage, (3) the frequency and extent of sex-related analyses, (4) the detection of sex- related differences in drug response and their statistical significance, and (5) the relationship between body weight and sex-related differences. The decision rules we used to code the NDAs are presented in table 5. In general, we coded the information we sought as present if there was any mention of it in the summary documents. To determine if IND annual reports filed with FDA met the regulatory requirement for tabulating the sex of enrolled study participants, we randomly selected a sample of 100 IND applications that met our inclusion criteria from FDA's November 2000 listing of active commercial IND applications. That listing included a total of 3,636 IND applications. According to FDA's management information system, 15 of the IND applications in our sample had been withdrawn and were not active, and sponsors for 9 of the IND applications were not required to submit annual reports because they had not been active for a long enough period. We also found that FDA could not find one of the annual reports (see table 6). Because we randomly selected the IND annual reports we examined, our findings are generalizable to the entire set of IND annual reports. However, because of the small size of our sample, our estimate of the proportion of annual reports not fulfilling regulatory requirements is not precise. In our review of the remaining 75 IND annual reports, the reports were considered to have met regulatory requirements if the numbers of enrolled participants were reported by sex for at least one of the reported studies. The regulation requires "tabulation" of the data; for purposes of our review we considered any presentation of the demographic data to meet the IND regulatory requirements. We weighted the percentage of women by drug class to compare the percentage of women in clinical drug trials from our sample to that of our 1992 study. In weighting the percentage of women in our study by the percentage of participants in trials for each drug class used in the 1992 study, we were able to control for differences in the types of drugs sampled and compare the two studies as if our sample included the same drugs. For example, participants in cancer drug trials made up 7 percent of all participants in the 1992 study of clinical drug trials but only 5 percent of the participants in the small-scale efficacy and full-scale safety and efficacy clinical trials we examined in this study. By weighting our sample so that 7 percent of the study participants we found were in trials for cancer drugs, for example, we can fairly compare the percentages of women participating in clinical drug trials from our 1992 study to those from this study. In reviewing the 36 NDAs, we also collected information to determine whether enough women were tested in the clinical drug trials to detect sex differences. Standards for participation of women in clinical drug trials have included nominal thresholds for women's participation (e.g., in our 1992 report, we regarded NDAs that tested 250 or more women as having enough women) and the representation of the sexes in numbers that are proportional to those in the population for whom a drug is intended. For this study, we adopted the perspective that the clinical trials should include a large enough number of women to demonstrate the safety and efficacy of the drug for women. To determine if enough women were tested in clinical drug trials to demonstrate the drugs' efficacy in women, we generally conducted a power analysis using the number of participants in, and outcome data from, pivotal trials. NDAs that reported a statistically significant improvement in women taking the drug compared to women in a control group clearly had enough women in the pivotal trials to meet this criterion. For NDAs that did not report this analysis, we took the largest effect size presented in the Integrated Summary of Efficacy (that is, the largest percentage improvement for those taking the drug), the total number of women participating in the treatment group for all of the pivotal trials, and the total number of women participating in the comparison group for all of the pivotal trials. We then calculated the critical ratio, and significance level, for that effect size and that number of cases. We found that all of the NDAs we examined in this way had enough women in the pivotal trials to demonstrate that the drug had a statistically significant effect. We followed the convention that statistical tests with a probability level less than or equal to .05 are regarded as statistically significant. We conducted our work from July 2000 through May 2001 in accordance with generally accepted government auditing standards. We were able to estimate the number of men and women who participated in the clinical drug trials for the 36 NDAs in our sample by reviewing the NDA summary documents and FDA Medical Officer Reviews. Table 7 represents the estimated percentage of men and women who participated in the clinical drug trials by drug development stage. Table 8 represents the estimated number of men and women who participated in the pivotal clinical drug trials overall, and, where available, in the treatment and comparison groups of the pivotal trials. The data in both tables are grouped according to drug class. For some NDAs, the sex of some or all of the participants was not specified by clinical drug development stage or treatment group. Lisanne Bradley, Emily J. Rowe, Robert M. Copeland, Lawrence S. Solomon, Anh Bui, and Jenny C. Chen also made major contributions to this report. Drug Safety: Most Drugs Withdrawn in Recent Years Had Greater Health Risks for Women (GAO-01-286R, January 23, 2001). Women's Health: NIH Has Increased Its Efforts to Include Women in Research (GAO/HEHS-00-96, May 2, 2000). Women's Health: FDA Needs to Ensure More Study of Gender Differences in Prescription Drug Testing (GAO/HRD-93-17, October 29, 1993). National Institutes of Health: Problems in Implementing Policy on Women in Study Populations (GAO/T-HRD-90-50, July 24, 1990).

This report reviews the Food and Drug Administration's (FDA) inclusion of women in clinical drug trials. GAO found that women were a majority of the clinical trial participants in the new drug applications (NDA) it examined and that every NDA included enough women in the pivotal studies to be able to statistically demonstrate that the drug is effective in women. Although these findings are welcome, GAO also found three areas of concern. The first is the relatively small proportion of women in early small-scale safety studies. These early studies provide important information on drugs' toxicity and safe dosing levels for later stages of clinical development, and many of the NDAs GAO examined found significant sex differences in a drug's pharmacokinetics, or how it is absorbed, distributed, metabolized, excreted, and concentrated in the bloodstream. Second, GAO is not confident that either NDA sponsors or FDA's reviewers took full advantage of the available data to learn more about the effects of the drug in women and to explore potential sex differences in dosing. This is because NDA summary documents are not required to include analyses of sex differences, and many of them do not. Third, FDA lacks appropriate management systems to monitor how many women are in clinical trials, to be certain that NDAs and investigational new drug applications (IND) annual reports comply with regulations for presenting outcome data by sex and tabulating the number of women included in ongoing trials, and to confirm that its medical officers have adequately addressed sex-related issues in their reviews. Although FDA has taken some promising initial steps to address these deficiencies, it is important that the agency finalize the pilot programs it has underway and give sustained attention to these management issues.

In March 2008, then Deputy Attorney General Craig Morford issued a memorandum--also known as the "Morford Memo"--to help ensure th the monitor selection process is collaborative, results in the selection of a highly-qualified monitor suitable for the assignment, avoids potential conflicts of interest, and is carried out in a manner that instills public confidence. The Morford Memo requires USAOs and other DOJ litiga divisions to establish ad hoc or standing committees consisting of the office's ethics advisor, criminal or section chief, and at least one other experienced prosecutor to consider the candidates--which may be proposed by either prosecutors, companies, or both--for each monitorship. DOJ components are also reminded to follow spec ified federal conflict of interest guidelines and to check monitor candidates for tion potential conflicts of interest relationships with the company. In addition, the names of all selected monitors for DPAs and NPAs must be submitted to ODAG for final approval. Following issuance of the Morford Memo, DOJ entered into 35 DPAs and NPAs, 6 of which required the company to hire an individual to oversee the company's compliance with the terms of the DPA. As of November 2009, DOJ had selected monitors for 4 of the 6 agreements. Based on o discussions with prosecutors and documentation from DOJ, we determined that for these 4 agreements, DOJ made the selections accordance with Morford Memo guidelines. Further, while the Morfo Memo does not specify a selection process that must be used in all cases it suggests that in some cases it may be appropriate for the company to select the monitor or propose a pool of qualified candidates from which DOJ will select the monitor. In all 4 of these cases, the company either selected the monitor, subject to DOJ's approval, or provided DOJ with proposed monitor candidates from among which DOJ selected the monitor. However, while we were able to determine that the prosec complied with the Morford Memo based on information obtained through our interviews, DOJ did not fully document the selection and approval process for 2 of the 4 monitor selections. The lack of such documentati will make it difficult for DOJ to validate to an independent third-party s reviewer, as well as to Congress and the public, that prosecutors acros DOJ offices followed Morford Memo guidelines and that monitors were selected in a way that was fair and merit based. For example, for 1 of these 2 agreements, DOJ did not document who in the U.S. Attorney's Office was on involved in reviewing the monitor candidates, which is important becaus e the Morford Memo requires that certain individuals in the office be part of the committee to consider the selection or veto of monitor candidates in order to ensure monitors are not selected unilaterally. For the second agreement, the Deputy Attorney General's approval of the selected monitor was relayed via telephone and not documented. As a result, in order to respond to our inquiries, DOJ officials had to reach out to individuals who were involved in the telephone call, one of whom w longer a DOJ employee, to obtain information regarding the monitor's approval. Documenting the reasons for selecting a particular monitor helps avoid the appear and practices--which are intended to instill public confidence in the monitor selection process--were followed. Therefore, in our June 25, 2009, testimony, we recommended that the Deputy Attorney General ado or internal procedures to document both the process used and reasons f monitor selection decisions. DOJ agreed with our recommendation an in August 2009, instituted such procedures. Specifically, DOJ requires ODAG to complete a checklist confirming receipt of the monitor selectio submission--including the process used and reasons for selecting the monitor--from the DOJ component; ODAG's review, recommendation,ance of favoritism and verifies that Morford Memo processes and decision to either approve or reject the proposed monitor; the DOJ component's notification of ODAG's decision; and ODAG's documentat of these steps. For the two monitors selected during or after August 2009, DOJ provided us with completed checklists to confirm that ODAG had followed the new procedures. While DOJ selected monitors in accordance with the Morford Memo, monitor selections have been d after the Morford Memo was issued. The selection of one monitor took 15 months from the time the agreement was signed and selection of two monitors, as discussed above, has been delayed for more than 17 months elayed for three agreements entered into from the time the agreement was signed. According to DOJ, the delays in selecting these three monitors have been due to challenges in identifyi ng candidates with proper experience and resources who also do not have potential conflicts of interest with the company. Further, DOJ's selection of monitors in these three cases took more time than its selection of monitors both prior to and since the issuance of the Morford Memo-- which on average was about 2 months from the time the NPA or DPA was signed or filed. According to the Senior Counsel to the Assistant Attorney General for the Criminal Division, for these three agreements, the prosecutors overseeing the cases have communicated with the companies to ensure that they are complying with the agreements. Further, DOJ reported that the prosecutors are working with each of the companies to extend the duration of the DPAs to ensure that the duties and goals of each monitorship are fulfilled and, as of October 2009, an agreement to extend the monitorship had been signed for one of the DPAs. Such action by DOJ will better position it to ensure that the companies are in compliance with the agreements while awaiting the selections of the monitors. For the 48 DPAs and NPAs where DOJ required independent monitors, companies have hired a total of 42 different monitors, more than half of whom were former DOJ employees. Specifically, of these 42 monitors, 23 previously worked at DOJ, while 13 did not. The 23 monitors held various DOJ positions, including Assistant U.S. Attorney, Section Chief or Division Chief in a litigating component, U.S. Attorney, Assistant Attorney General, and Attorney General. The length of time between the monitor's separation from DOJ and selection as monitor ranged from 1 year to more than 30 years, with an average of 13 years. Five individuals were selected to serve as monitors within 3 years or less of being employed at DOJ. In addition, 8 of these 23 monitors had previously worked in the USAO or DOJ litigating component that oversaw the DPA or NPA for which they were the monitor. In these 8 cases, the length of time between the monitor's separation from DOJ and selection as monitor ranged from 3 years to 34 years, with an average of almost15 years. Of the remaining 13 monitors with no previous DOJ experience, 6 had previous experience at a state or local government agency, for example, as a prosecutor in a district attorney's office; 3 had worked in federal agencies other than DOJ, including the Securities and Exchange Commission and the Office of Management and Budget; 2 were former judges; 2 were attorneys in the military; 3 had worked solely in private practice in a law firm; and 1 had worked as a full-time professor. Of the 13 company representatives with whom we spoke who were required to hire independent monitors, in providing perspectives on monitors' previous experience, representatives from 5 of these companies stated that prior employment at DOJ or an association with a DOJ employee could impede the monitor's independence and impartiality, whereas representatives from the other 8 companies disagreed. Specific concerns raised by the 5 companies--2 of which had monitors with prior DOJ experience--included the possibility that the monitor would favor DOJ and have a negative predisposition toward the company or, if the monitor recently left DOJ, the monitor may not be considered independent; however, none of the companies identified specific instances with their monitors where this had occurred. Of the remaining 8 company representatives who did not identify concerns, 6 of them worked with monitors who were former DOJ employees, and some of these officials commented on their monitors' fairness and breadth of experience. In addition 5 company representatives we spoke with who were involved in the monitor selection process said that they were specifically looking for monitors with DOJ experience and knowledge of the specific area of law that the company violated. Officials from 8 of the 13 companies with whom we spoke raised concerns about their monitors, which were either related to how monitors were carrying out their responsibilities or issues regarding the overall cost of the monitorship. However, these companies said that it was unclear to what extent DOJ could help to address these concerns. Seven of the 13 companies identified concerns about the scope of the monitor's responsibilities or the amount of work the monitor completed. For example, 1 company said that the monitor had a large number of staff assisting him on the engagement, and he and his staff attended more meetings than the company felt was necessary, some of which were unrelated to the monitor responsibilities delineated in the agreement, such as a community service organization meeting held at the company when the DPA was related to securities fraud. As a result, the company believes that the overall cost of the monitorship--with 20 to 30 lawyers billing the company each day--was higher than necessary. Another company stated that its monitor did not complete the work required in the agreement in the first phase of the monitorship--including failing to submit semi-annual reports on the company's compliance with the agreement to DOJ during the first 2 years of the monitorship-- resulting in the monitor having to complete more work than the company anticipated in the final phase of the monitorship. According to the company, this led to unexpectedly high costs in proportion to the company's revenue in the final phase, which was significant because the company is small. Further, according to a company official, the monitor's first report contained numerous errors that the company did not have sufficient time to correct before the report was submitted to DOJ and, thus, DOJ received a report containing errors. While 6 of the 13 companies we interviewed did not express concerns about the monitor's rates, 3 companies expressed concern that the monitor's rate (which ranged from $290 per hour to a rate of $695 to $895 per hour among the companies that responded to our survey) was high. Further, while 9 of the 13 companies that responded to our survey believed that the total compensation received by the monitor or monitoring firm was reasonable for the type and amount of work performed (which, according to the companies that responded to our survey, ranged from $8,000 to $2.1 million per month), 3 companies did not believe it was reasonable. When asked how they worked to resolve these issues with the monitor, companies reported that they were unaware of any mechanisms available to resolve the issues--including DOJ involvement--or if they were aware that DOJ could get involved they were reluctant to seek DOJ's assistance. Specifically, three of the eight companies that identified concerns with their monitor were not aware of any mechanism in place to raise these concerns with DOJ. Four companies were aware that they could raise these concerns with DOJ, but three of these companies said that they would be reluctant to raise these issues with DOJ in fear of repercussions. Another company did not believe that DOJ had the authority to address their concerns because they were related to staffing costs, which were delineated in the contract negotiated between the company and the monitor, not the DPA. However, DOJ had a different perspective than the company officials on its involvement in resolving disputes between companies and monitors. According to the Senior Counsel to the ODAG, while DOJ has not established a mechanism through which companies can raise concerns with their monitors to DOJ and clearly communicated to companies how they should do so, companies are aware that they can raise monitor- related concerns to DOJ if needed. Further, it was the Senior Counsel's understanding that companies frequently raise issues regarding DPAs and NPAs to DOJ without concerns about retribution, although to his knowledge, no companies had ever raised monitor-related concerns to ODAG. The Senior Counsel acknowledged, however, that even if companies did raise concerns to DOJ regarding their monitors, the point in the DPA process at which they did so may determine the extent of DOJ's involvement. Specifically, according to this official, while he believed that DOJ may be able to help resolve a dispute after the company and monitor enter into a contract, he stated that, because DOJ is not a party to the contract, if a conflict were to arise over, for instance, the monitor's failure to complete periodic reports, DOJ could not compel the monitor to complete the reports, even if the requirement to submit periodic reports was established in the DPA or NPA. In contrast, the Senior Counsel said that if the issues between monitors and companies arise prior to the two parties entering into a contract, such as during the fee negotiation phase, DOJ may be able to play a greater role in resolving the conflict. However, the mechanisms that DOJ could use to resolve such issues with the monitor are uncertain since while the monitor's role is delineated in the DPA, there is no contractual agreement between DOJ and the monitor. DOJ is not a party to the monitoring contract signed by the company and the monitor, and the monitor is not a party to the DPA signed by DOJ and the company. We are aware of at least one case in which the company sought DOJ's assistance in addressing a conflict with the monitor regarding fees, prior to the monitor and company signing their contract. Specifically, one company raised concerns about the monitor to the U.S. Attorney handling the case, stating that, among other things, the company believed the monitor's fee arrangement was unreasonably high and the monitor's proposed billing arrangements were not transparent. The U.S. Attorney declined to intervene in the dispute stating that it was still at a point at which the company and the monitor could resolve it. The U.S. Attorney instructed the company to quickly resolve the dispute directly with the monitor--noting that otherwise, the dispute might distract the company and the monitor from resolving the criminal matters that were the focus of the DPA. The U.S. Attorney also asked the company to provide an update on its progress in resolving the conflict the following week. A legal representative of the company stated that he did not believe he had any other avenue for addressing this dispute after the U.S. Attorney declined to intervene. As a result, although the company disagreed with the high fees, it signed the contract because it did not want to begin the monitorship with a poor relationship with the monitor resulting from a continued fee dispute. The Senior Counsel to the ODAG stated that because the company is signatory to both the DPA or NPA and the contract with the monitor, it is the company's responsibility to ensure that the monitor is performing the duties described in the agreement. However, 5 of the 7 companies that had concerns about the scope of the monitor's responsibilities or the amount of work the monitor completed did not feel as if they could adequately address their issues by discussing them with the monitors. This is because two companies said that they lacked leverage to address issues with monitors and two companies feared repercussions if they raised issues with their monitors. The Senior Counsel stated that one way the company could hold the monitor accountable is by incorporating the monitor requirements listed in the DPA into the monitoring contract and additionally include a provision in the contract that the monitor can be terminated for not meeting these requirements. However, the companies that responded to our survey did not generally include monitor termination provisions in their contracts. Specifically, 7 of the 13 companies that responded to our survey reported that their monitoring contract contained no provisions regarding termination of the monitor, and another 3 companies reported that their contract contained a clause that actually prohibited the company from terminating the monitor. Only 1 company that responded to our survey reported that the contract allowed it to terminate the monitor with written notice at any time, once the company and DOJ agreed (and subject to the company's obligation to pay the monitor). This contract also included a provision allowing for the use of arbitration to resolve disputes between the company and the monitor over, for instance, services rendered and fees. In order to more consistently include such termination clauses in the monitoring contracts, companies would need the monitor's consent. Given that DOJ makes the final decision regarding the selection of a particular monitor--and that DOJ allows for, but does not require, company involvement in the monitor selection process--it is uncertain how much leverage the company would have to negotiate that such termination or dispute resolution terms be included in the contract with the monitor. Because monitors are one mechanism that DOJ uses to ensure that companies are reforming and meeting the goals of DPAs and NPAs, DOJ has an interest in monitors performing their duties properly. While over the course of our review, we discussed with DOJ officials various mechanisms by which conflicts between companies and monitors could be resolved, including when it would be appropriate for DOJ to be involved, DOJ officials acknowledged that prosecutors may not be having similar discussions with companies about resolving conflict. This could lead to differing perspectives between DOJ and companies on how such issues should be addressed. Internal control standards state that agency management should ensure that there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency achieving its goals. According to DOJ officials, the Criminal Division Fraud Section has made some efforts to clarify what role it will play in resolving disputes between the company and the monitor. For example, 11 of 17 DPAs or NPAs entered into by the Fraud Section that required monitors allowed companies to bring to DOJ's attention any disputes over implementing recommendations made by monitors during the course of their reviews of company compliance with DPAs and NPAs. In addition, 8 of these 11 agreements provide for DOJ to resolve disputes between the company and the monitor related to the work plan the monitor submitted to DOJ and the company before beginning its review of the company. Additionally, in 5 agreements entered into by one USAO, the agreement specified that the company could bring concerns about unreasonable costs of outside professionals--such as accountants or consultants--hired by the monitor to the USAO for dispute resolution. While the Criminal Division Fraud Section and one USAO have made efforts to articulate in the DPA or NPA the extent to which DOJ would be willing to be involved in resolving specific kinds of monitor issues for that particular case, other DOJ litigating divisions and USAOs that entered into DPAs and NPAs have not. Clearly communicating to companies and monitors in each DPA and NPA the role DOJ will play in addressing companies' disputes with monitors would help better position DOJ to be notified of potential issues companies have identified related to monitor performance. According to DOJ, DPAs and NPAs can be invaluable tools for fighting corporate corruption and helping to rehabilitate a company, although use of these agreements has not been without controversy. DOJ has taken steps to address concerns that monitors are selected based on favoritism or bias by developing and subsequently adhering to the Morford Memo guidelines. However, once the monitors are selected and any issues--such as fee disputes or concerns with the amount of work the monitor is completing--arise between the monitor and the company, it is not always clear what role, if any, DOJ will play in helping to resolve these issues. Clearly communicating to companies and monitors the role DOJ will play in addressing companies' disputes with monitors would help better position DOJ to be made aware of issues companies have identified related to monitor performance, which is of interest to DOJ since it relies on monitors to assess companies' compliance with DPAs and NPAs. We are continuing to assess the potential need for additional guidance or other improvements in the use of DPAs and NPAs in our ongoing work. To provide clarity regarding DOJ's role in resolving disputes between companies and monitors, the Attorney General should direct all litigating components and U.S. Attorneys Offices to explain in each corporate DPA or NPA what role DOJ could play in resolving such disputes, given the facts and circumstances of the case. We requested comments on a draft of this statement from DOJ. DOJ did not provide official written comments to include in the statement. However, in an email sent to us on November 17, 2009, DOJ provided technical comments, which we incorporated into the statement, as appropriate. For questions about this statement, please contact Eileen R. Larence at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Kristy N. Brown, Jill Evancho, Tom Jessor, Sarah Kaczmarek, Danielle Pakdaman, and Janet Temko, as well as Katherine Davis and Amanda Miller. 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.

Recent cases of corporate fraud and mismanagement heighten the Department of Justice's (DOJ) need to appropriately punish and deter corporate crime. Recently, DOJ has made more use of deferred prosecution and non-prosecution agreements (DPAs and NPAs), in which prosecutors may require company reform, among other things, in exchange for deferring prosecution, and may also require companies to hire an independent monitor to oversee compliance. This testimony addresses (1) the extent to which prosecutors adhered to DOJ's monitor selection guidelines, (2) the prior work experience of monitors and companies' opinions of this experience, and (3) the extent to which companies raised concerns about their monitors, and whether DOJ had defined its role in resolving these concerns. Among other steps, GAO reviewed DOJ guidance and examined the 152 agreements negotiated from 1993 (when the first 2 were signed) through September 2009. GAO also interviewed DOJ officials, obtained information on the prior work experience of monitors who had been selected, and interviewed representatives from 13 companies with agreements that required monitors. These results, while not generalizable, provide insights into monitor selection and oversight. Prosecutors adhered to DOJ guidance issued in March 2008 in selecting monitors required under agreements entered into since that time. Monitor selections in two cases have not yet been made due to challenges in identifying candidates with proper experience and resources and without potential conflicts of interests with the companies. DOJ issued guidance in March 2008 to help ensure that the monitor selection process is collaborative and based on merit; this guidance also requires prosecutors to obtain Deputy Attorney General approval for the monitor selection. For DPAs and NPAs requiring independent monitors, companies hired a total of 42 different individuals to oversee the agreements; 23 of the 42 monitors had previous experience working for DOJ--which some companies valued in a monitor choice--and those without prior DOJ experience had worked in other federal, state, or local government agencies, the private sector, or academia. The length of time between the monitor's leaving DOJ and selection as a monitor ranged from 1 year to over 30 years, with an average of 13 years. While most of the companies we interviewed did not express concerns about monitors having prior DOJ experience, some companies raised general concerns about potential impediments to independence or impartiality if the monitor had previously worked for DOJ or had associations with DOJ officials. Representatives for more than half of the 13 companies with whom GAO spoke raised concerns about the monitor's cost, scope, and amount of work completed--including the completion of compliance reports required in the DPA or NPA--and were unclear as to the extent DOJ could be involved in resolving such disputes, but DOJ has not clearly communicated to companies its role in resolving such concerns. Companies and DOJ have different perceptions about the extent to which DOJ can help to resolve monitor disputes. DOJ officials GAO interviewed said that companies should take responsibility for negotiating the monitor's contract and ensuring the monitor is performing its duties, but that DOJ is willing to become involved in monitor disputes. However, some company officials were unaware that they could raise monitor concerns to DOJ or were reluctant to do so. Internal control standards state that agency management should ensure there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency achieving its goals. While one of the DOJ litigating divisions and one U.S. Attorney's Office have made efforts to articulate in the DPAs and NPAs what role they could play in resolving monitor issues, other DOJ litigation divisions and U.S. Attorney's Offices have not done so. Clearly communicating to companies the role DOJ will play in addressing companies' disputes with monitors would help increase awareness among companies and better position DOJ to be notified of potential issues related to monitor performance.

Federal statutes provide for civil and criminal penalties for the production, advertising, possession, receipt, distribution, and sale of child pornography. Of particular relevance to this report, the child pornography statutes prohibit the use of any means of interstate or foreign commerce (which will typically include the use of an interactive computer service) to sell, advertise, distribute, receive, or possess child pornography. Additionally, federal obscenity statutes prohibit the use of any means of interstate or foreign commerce or an interactive computer service to import, transport, or distribute obscene material or to transfer obscene material to persons under the age of 16. Child pornography is defined by statute as the visual depiction of a minor--a person under 18 years of age--engaged in sexually explicit conduct. By contrast, for material to be defined as obscene depends on whether an average person, applying contemporary community standards, would interpret the work--including images--to appeal to the prurient interest and to be patently offensive, and whether a reasonable person would find the material lacks serious literary, artistic, political, or scientific value. In addition to making it a crime to transport, receive, sell, distribute, advertise, or possess child pornography in interstate or foreign commerce, federal child pornography statutes prohibit, among other things, the use of a minor in producing pornography, and they provide for criminal and civil forfeiture of real and personal property used in making child pornography and of the profits of child pornography. Child pornography, which is intrinsically related to the sexual abuse of children, is unprotected by the First Amendment. Nor does the First Amendment protect the production, distribution, or transfer of obscene material. In enacting the Child Pornography Prevention Act of 1996, Congress sought to expand the federal prohibition against child pornography from images that involve actual children to sexually explicit images that only appear to depict minors but were produced without using any real children. The act defines child pornography as "any visual depiction, including any photograph, film, video, picture, or computer or computer- generated image or picture" that "is, or appears to be, of a minor engaging in sexually explicit conduct" or is "advertised, promoted, presented, described, or distributed in such a manner that conveys the impression that the material is or contains a visual depiction of a minor engaging in sexually explicit conduct." Last year, the Supreme Court struck down this legislative attempt to ban "virtual" child pornography in Ashcroft v. The Free Speech Coalition, ruling that the expansion of the act to material that did not involve and thus harm actual children in its creation is an unconstitutional violation of free speech rights. According to government officials, this ruling may increase the difficulty faced by law enforcement agencies in prosecuting those who produce and possess child pornography. Since the government must establish that the digital images of children engaged in sexual acts are those of real children, it may be difficult to prosecute cases in which the defendants claim that the images in question are of "virtual" children. Historically, pornography, including child pornography, tended to be found mainly in photographs, magazines, and videos. The arrival and the rapid expansion of the Internet and its technologies, the increased availability of broadband Internet services, advances in digital imaging technologies, and the availability of powerful digital graphic programs have brought about major changes in both the volume and the nature of available child pornography. The proliferation of child pornography on the Internet is prompting wide concern. According to a recent survey, over 90 percent of Americans say they are concerned about child pornography on the Internet, and 50 percent of Americans cite child pornography as the single most heinous crime that takes place on line. According to experts, pornographers have traditionally exploited--and sometimes pioneered--emerging communication technologies--from the dial-in bulletin board systems of the 1970s to the World Wide Web--to access, trade, and distribute pornography, including child pornography. Today, child pornography is available through virtually every Internet technology (see table 1). Among the principal channels for the distribution of child pornography are commercial Web sites, Usenet newsgroups, and peer-to-peer networks. Web sites. According to recent estimates, there are about 400,000 commercial pornography Web sites worldwide, with some of the sites selling pornographic images of children. The profitability and the worldwide reach of the child pornography trade was recently demonstrated by an international child pornography ring that included a Texas-based firm providing credit card billing and password access services for one Russian and two Indonesian child pornography Web sites. According to the U.S. Postal Inspection Service, the ring grossed as much as $1.4 million in just 1 month selling child pornography to paying customers. Usenet. Usenet newsgroups are also providing access to pornography, with several of the image-oriented newsgroups being focused on child erotica and child pornography. These newsgroups are frequently used by commercial pornographers who post "free" images to advertise adult and child pornography available for a fee from their Web sites. The increase in the availability of child pornography in Usenet newsgroups represents a change from the mid-1990's, when a 1995-96 study of 9,800 randomly selected images taken from 32 Usenet newsgroups found that only a small fraction of posted images contained child pornography themes. Peer-to-peer networks. Although peer-to-peer file-sharing programs are largely known for the extensive sharing of copyrighted digital music, they are emerging as a conduit for the sharing of child pornography images and videos. A recent study by congressional staff found that one use of file- sharing programs is to exchange pornographic materials, such as adult videos. The study found that a single search for the term "porn" using a similar file-sharing program yielded over 25,000 files, more than 10,000 of which were video files appearing to contain pornographic images. In another study, focused on the availability of pornographic video files on peer-to-peer sharing networks, a sample of 507 pornographic video files retrieved with a file-sharing program included about 3.7 percent child pornography videos. Table 2 shows the key national organizations and agencies that are currently involved in efforts to combat child pornography on peer-to-peer networks. The National Center for Missing and Exploited Children (NCMEC), a federally funded nonprofit organization, serves as a national resource center for information related to crimes against children. Its mission is to find missing children and prevent child victimization. The center's Exploited Child Unit operates the CyberTipline, which receives child pornography tips provided by the public; its CyberTipline II also receives tips from Internet service providers. The Exploited Child Unit investigates and processes tips to determine if the images in question constitute a violation of child pornography laws. The CyberTipline provides investigative leads to the Federal Bureau of Investigation (FBI), U.S. Customs, the Postal Inspection Service, and state and local law enforcement agencies. The FBI and the U.S. Customs also investigate leads from Internet service providers via the Exploited Child Unit's CyberTipline II. The FBI, Customs Service, Postal Inspection Service, and Secret Service have staff assigned directly to NCMEC as analysts. Two organizations in the Department of Justice have responsibilities regarding child pornography: the FBI and the Justice Criminal Division's Child Exploitation and Obscenity Section (CEOS). The FBI investigates various crimes against children, including federal child pornography crimes involving interstate or foreign commerce. It deals with violations of child pornography laws related to the production of child pornography; selling or buying children for use in child pornography; and the transportation, shipment, or distribution of child pornography by any means, including by computer. CEOS prosecutes child sex offenses and trafficking in women and children for sexual exploitation. Its mission includes prosecution of individuals who possess, manufacture, produce, or distribute child pornography; use the Internet to lure children to engage in prohibited sexual conduct; or traffic in women and children interstate or internationally to engage in sexually explicit conduct. Two organizations in the Department of the Treasury have responsibilities regarding child pornography: the Customs Service and the Secret Service. The Customs Service targets illegal importation and trafficking in child pornography and is the country's front line of defense in combating child pornography distributed through various channels, including the Internet. Customs is involved in cases with international links, focusing on pornography that enters the United States from foreign countries. The Customs CyberSmuggling Center has the lead in the investigation of international and domestic criminal activities conducted on or facilitated by the Internet, including the sharing and distribution of child pornography on peer-to-peer networks. Customs maintains a reporting link with NCMEC, and it acts on tips received via the CyberTipline from callers reporting instances of child pornography on Web sites, Usenet newsgroups, chat rooms, or the computers of users of peer-to-peer networks. The center also investigates leads from Internet service providers via the Exploited Child Unit's CyberTipline II. The U.S. Secret Service does not investigate child pornography cases on peer-to-peer networks; however, it does provide forensic and technical support to NCMEC, as well as to state and local agencies involved in cases of missing and exploited children. In November 2002, we reported that federal agencies are effectively coordinating their efforts to combat child pornography, and we recommended that the Attorney General designate the Postal Inspection Service and Secret Service as agencies that should receive reports and tips of child pornography under the Protection of Children from Sexual Predators Act of 1998 in addition to the FBI and Customs. The Department of Justice, while agreeing with our finding that federal agencies have mechanisms in place to coordinate their efforts, did not fully support our conclusion and recommendation that federal coordination efforts would be further enhanced if the Postal Inspection Service and the Secret Service were provided direct access to tips reported to NCMEC by remote computing service and electronic communication service providers. Justice said that the FBI and Customs, the agencies that currently have direct access, can and do share these tips with the Secret Service and the Postal Inspection Service, as appropriate, and Justice believes that this coordination has been effective. Justice questioned whether coordination would be further enhanced by having the Secret Service and the Postal Inspection Service designated to receive access to these tips directly from NCMEC; however, Justice said that it is studying this issue as it finalizes regulations implementing the statute. Child pornography is easily shared and accessed through peer-to-peer file- sharing programs. Our analysis of 1,286 titles and file names identified through KaZaA searches on 12 keywords showed that 543 (about 42 percent) of the images had titles and file names associated with child pornography images. Of the remaining files, 34 percent were classified as adult pornography, and 24 percent as nonpornographic (see fig. 1). No files were downloaded for this analysis. The ease of access to child pornography files was further documented by retrieval and analysis of image files, performed on our behalf by the Customs CyberSmuggling Center. Using 3 of the 12 keywords that we used to document the availability of child pornography files, a CyberSmuggling Center analyst used KaZaA to search, identify, and download 305 files, including files containing multiple images and duplicates. The analyst was able to download 341 images from the 305 files identified through the KaZaA search. The CyberSmuggling Center analysis of the 341 downloaded images showed that 149 (about 44 percent) of the downloaded images contained child pornography (see fig. 2). The center classified the remaining images as child erotica (13 percent), adult pornography (29 percent), or nonpornographic (14 percent). These results are consistent with the observations of NCMEC, which has stated that peer-to-peer technology is increasingly popular for the dissemination of child pornography. However, it is not the most prominent source for child pornography. As shown in table 3, since 1998, most of the child pornography referred by the public to the CyberTipline was found on Internet Web sites. Since 1998, the center has received over 76,000 reports of child pornography, of which 77 percent concerned Web sites, and only 1 percent concerned peer-to-peer networks. Web site referrals have grown from about 1,400 in 1998 to over 26,000 in 2002--or about a nineteenfold increase. NCMEC did not track peer-to-peer referrals until 2001. In 2002, peer-to-peer referrals increased more than fourfold, from 156 to 757, reflecting the increased popularity of file-sharing programs. Juvenile users of peer-to-peer networks face a significant risk of inadvertent exposure to pornography when searching and downloading images. In a search using innocuous keywords likely to be used by juveniles searching peer-to-peer networks (such as names of popular singers, actors, and cartoon characters), almost half of the images downloaded were classified as adult or cartoon pornography. Juvenile users may also be inadvertently exposed to child pornography through such searches, but the risk of such exposure is smaller than that of exposure to pornography in general. To document the risk of inadvertent exposure of juvenile users to pornography, the Customs CyberSmuggling Center performed KaZaA searches using innocuous keywords that would likely be used by juveniles. The center image searches used three keywords representing the names of a popular female singer, child actors, and a cartoon character. A center analyst performed the search, retrieval, and analysis of the images, each of which was classified into one of five categories: child pornography, child erotica, adult pornography, cartoon pornography, or nonpornographic. The searches produced 157 files, some of which were duplicates. The analyst was able to download 177 images from the 157 files identified through the search. As shown in figure 3, our analysis of the CyberSmuggling Center's classification of the 177 downloaded images determined that 61 images contained adult pornography (34 percent), 24 images consisted of cartoon pornography (14 percent), 13 images contained child erotica (7 percent), and 2 images (1 percent) contained child pornography. The remaining 77 images were classified as nonpornographic. Because law enforcement agencies do not track the resources dedicated to specific technologies used to access and download child pornography on the Internet, we were unable to quantify the resources devoted to investigations concerning peer-to-peer networks. These agencies (including the FBI, CEOS, and Customs) do devote significant resources to combating child exploitation and child pornography in general. Law enforcement officials told us, however, that as tips concerning child pornography on the peer-to-peer networks increase, they are beginning to focus more law enforcement resources on this issue. In fiscal year 2002, the key organizations involved in combating child pornography on peer-to-peer networks reported the following levels of funding: NCMEC received about $12 million for its congressionally mandated role as the national resource center and clearinghouse. NCMEC also received about $10 million for law enforcement training and about $3.3 million for the Exploited Child Unit and the promotion of its CyberTipline. From the appropriated amounts, NCMEC allocated $916,000 to combat child pornography and referred 913 tips concerning peer-to-peer networks to law enforcement agencies. The FBI allocated $38.2 million and 228 agents and support personnel to combat child pornography through its Innocent Images unit. Since fiscal year 1996, the Innocent Image National Initiative opened 7,067 cases, obtained 1,811 indictments, performed 1,886 arrests, and secured 1,850 convictions or pretrial diversions in child pornography cases. According to FBI officials, they are aware of the use of peer-to-peer networks to disseminate child pornography and have efforts under way to work with some of the peer-to-peer companies to solicit their cooperation in dealing with this issue. CEOS allocated $4.38 million and 28 personnel to combat child exploitation and obscenity offenses. It has recently launched an effort, the High Tech Investigative Unit, dealing with investigating any Internet medium that distributes child pornography, including peer-to-peer networks. Customs allocated $15.6 million and over 144,000 hours to combating child exploitation and obscenity offenses. The CyberSmuggling Center is beginning to actively monitor the file sharing of child pornography on peer-to-peer networks and is devoting one half-time investigator to this effort. As of December 16, 2002, the center has sent 21 peer-to-peer investigative leads to the field offices for follow-up action. Four of these leads have search warrants pending, two have been referred to local law enforcement, and five have been referred to foreign law enforcement agencies. In addition, to facilitate the identification of the victims of child pornographers, the CyberSmuggling Center is devoting resources to the National Child Victim Identification Program, a consolidated information system containing seized images that is designed to allow law enforcement officials to quickly identify and combat the current abuse of children associated with the production of child pornography. The system's database is being populated with all known and unique child pornographic images obtained from national and international law enforcement sources and from CyberTipline reports filed with NCMEC. It will initially hold over 100,000 images that have been collected by federal law enforcement agencies from various sources, including old child pornography magazines. According to Customs officials, this information will help, among other things, to determine whether actual children were used to produce child pornography images by matching them with images of children from magazines published before modern imaging technology was invented. Such evidence can be used to counter the assertion that only virtual children appear in certain images. The system is housed at the Customs CyberSmuggling Center and is to be accessed remotely in "read only" format by the FBI, CEOS, the U.S. Postal Inspection Service, and NCMEC. An initial version of the system was deployed at the Customs CyberSmuggling Center in September 2002; the system became operational in January 2003. It is easy to access and download child pornography on peer-to-peer networks. Juvenile users of peer-to-peer networks also face a significant risk of inadvertent exposure to pornography, including child pornography. We were unable to determine the extent of federal law enforcement resources available for combating child pornography on peer-to-peer networks; the key law enforcement agencies devote resources to combating child exploitation and child pornography in general, but they do not track the resources dedicated to peer-to-peer technologies in particular. The Assistant Attorney General, Criminal Division, Department of Justice, provided written comments on a draft of this report, which are reprinted in appendix III. The Department of Justice agreed with the report's findings, provided additional information on the mission and capabilities of the High Tech Investigative Unit (part of its Criminal Division's Child Exploitation and Obscenity Section), and offered comments on the description and purpose of Customs' National Child Victim Identification Program. In response, we have revised our report to add these clarifications. We also received written technical comments from the Department of Justice, which we have incorporated as appropriate. We received written technical comments from the Assistant Director, Office of Inspection, U.S. Secret Service, and from the Acting Director, Office of Planning, U.S. Customs Service. Their comments have been incorporated in the report as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Chairmen and Ranking Minority Members of other Senate and House committees and subcommittees that have jurisdiction and oversight responsibility for the Departments of Justice and the Treasury. We will also send copies to the Attorney General and to the Secretary of the Treasury. Copies will be made available to others on request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions concerning this report, please call me at (202) 512-6240 or Mirko J. Dolak, Assistant Director, at (202) 512-6362. We can be also reached by E-mail at [email protected] and [email protected], respectively. Key contributors to this report were Barbara S. Collier, James M. Lager, Neelaxi V. Lakhmani, James R. Sweetman, Jr., and Jessie Thomas. determine the ease of access to child pornography on peer-to-peer assess the risk of inadvertent exposure of juvenile users of peer-to-peer networks to pornography, including child pornography, and determine the extent of federal law enforcement resources available for combating child pornography on peer-to-peer networks. To determine the availability of child pornography on peer-to-peer networks, we used a popular peer-to-peer application--KaZaA--to search for and identify image files that appear to be child pornography. Our analysts used keywords provided by the Customs CyberSmuggling Center. These keywords were intended to identify pornographic images; examples of the keywords include preteen, underage, and incest. Once the names and titles of image files were gathered, we classified and analyzed them based on file names and keywords. Each file was classified as child pornography, adult pornography, or nonpornographic. For a file to be considered possible child pornography, the title, file name, or both had to include at least one word with a sexual connotation and an age-related keyword indicating that the subject is a minor. Files depicting adult pornography included any file that had words of a sexual nature in the title or file name. No files were downloaded for this analysis. To determine the ease of access, we used three keywords from the initial list to perform another search. The resulting files were downloaded, saved, and analyzed by a Customs agent. Because child pornography cannot be accessed legally other than by law enforcement agencies, we relied on Customs to download and analyze files. Our own analyses were based on keywords and file names only. The Customs agent classified each of the downloaded files into one of four categories: child pornography, child erotica, adult pornography, or nonpornographic. The user with the largest number of shared files that appeared to be child pornography was also identified, and the shared folder was captured. The titles and names of files in the user's shared directory were then analyzed and classified by a GAO analyst using the same classification criteria used in original analysis. To assess the risk of inadvertent exposure of juvenile users of peer-to-peer networks to pornography, a CyberSmuggling Center analyst conducted another search using three keywords that are names of popular celebrities and a cartoon character. The Customs analyst performed the search, retrieval, and analysis of the images. Each of the images downloaded was classified into one of five categories: adult pornography, child pornography, child erotica, cartoon pornography, or nonpornographic. To determine what federal law enforcement resources were allocated to combating child pornography on peer-to-peer networks, we obtained resource allocation data and interviewed officials at the U.S. Customs Service, the Department of Justice's Child Exploitation and Obscenity Section, and the Federal Bureau of Investigation. We also received information about what resources were being allocated to combat child pornography from the U.S. Secret Service and the National Center for Missing and Exploited Children. We performed our work between July and October 2002 at the U.S. Secret Service in Baltimore, Maryland, and the U.S. Customs Service, Customs CyberSmuggling Center, in Fairfax, Virginia, under the Department of the Treasury; and at the Child Exploitation and Obscenity Section and the Federal Bureau of Investigation, under the Department of Justice, in Washington, D.C. We also worked with the National Center for Missing and Exploited Children in Alexandria, Virginia. Our work was conducted in accordance with generally accepted government auditing standards. Peer-to-peer file-sharing programs represent a major change in the way Internet users find and exchange information. Under the traditional Internet client/server model, the access to information and services is accomplished by the interaction between users (clients) and servers-- usually Web sites or portals. A client is defined as a requester of services, and a server is defined as the provider of services. Unlike the traditional model, the peer-to-peer model enables consenting users--or peers--to directly interact and share information with each other without the intervention of a server. A common characteristic of peer-to-peer programs is that they build virtual networks with their own mechanisms for routing message traffic. The ability of peer-to-peer networks to provide services and connect users directly has resulted in a large number of powerful applications built around this model. These range from the SETI@home network (where users share the computing power of their computers to search for extraterrestrial life) to the popular KaZaA file-sharing program (used to share music and other files). As shown in figure 4, there are two main models of peer-to-peer networks: (1) the centralized model, based on a central server or broker that directs traffic between individual registered users, and (2) the decentralized model, based on the Gnutella network, in which individuals find and interact directly with each other. As shown in figure 4, the centralized model relies on a central server/broker to maintain directories of shared files stored on the respective computers of the registered users of the peer-to-peer network. When Bob submits a request for a particular file, the server/broker creates a list of files matching the search request by checking the request with its database of files belonging to registered users currently connected to the network. The broker then displays that list to Bob, who can then select the desired file from the list and open a direct link with Alice's computer, which currently has the file. The download of the actual file takes place directly from Alice to Bob. The broker model was used by Napster, the original peer-to-peer network, facilitating mass sharing of copyrighted material by combining the file names held by thousands of users into a searchable directory that enabled users to connect with each other and download MP3 encoded music files. The broker model made Napster vulnerable to legal challenges and eventually led to its demise in September 2002. Although Napster was litigated out of existence and its users fragmented among many alternative peer-to-peer services, most current-generation peer-to-peer networks are not dependent on the server/broker that was the central feature of the Napster service, so, according to Gartner, these networks are less vulnerable to litigation from copyright owners. In the decentralized model, no brokers keep track of users and their files. To share files using the decentralized model, Ted starts with a networked computer equipped with a Gnutella file-sharing program, such as KaZaA or BearShare. Ted connects to Carol, Carol to Bob, Bob to Alice, and so on. Once Ted's computer has announced that it is "alive" to the various members of the peer network, it can search the contents of the shared directories of the peer network members. The search request is sent to all members of the network, starting with Carol, who will each in turn send the request to the computers to which they are connected, and so forth. If one of the computers in the peer network (say, for example, Alice's) has a file that matches the request, it transmits the file information (name, size, type, etc.) back through all the computers in the pathway towards Ted, where a list of files matching the search request appears on Ted's computer through the file-sharing program. Ted will then be able to open a connection with Alice and download the file directly from Alice's computer. One of the key features of Napster and the current generation of decentralized peer-to-peer technologies is their use of a virtual name space (VNS). A VNS dynamically associates user-created names with the Internet address of whatever Internet-connected computer users happen to be using when they log on. The VNS facilitates point-to-point interaction between individuals, because it removes the need for users and their computers to know the addresses and locations of other users; the VNS can, to certain extent, preserve users' anonymity and provide information on whether a user is or is not connected to the Internet at a given moment. The file-sharing networks that result from the use of peer-to-peer technology are both extensive and complex. Figure 5 shows a map or topology of a Gnutella network whose connections were mapped by a network visualization tool. The map, created in December 2000, shows 1,026 nodes (computers connected to more than one computer) and 3,752 edges (computers on the edge of the network connected to a single computer). This map is a snapshot showing a network in existence at a given moment; these networks change constantly as users join and depart them. Operating at bandwidths markedly greater than that provided by telephone networks. Broadband networks can carry digital videos or a massive quantity of data simultaneously. In the on-line environment, the term is often used to refer to Internet connections provided through cable or DSL (digital subscriber line) modems. A file-sharing program for Gnutella networks. BearShare supports the trading of text, images, audio, video, and software files with any other user of the network. In the peer-to-peer environment, an intermediary computer that coordinates and manages requests between client computers. Images of cartoon characters engaged in sexual activity. Internet program enabling users to communicate through short written messages. Some of the most popular chat programs are America Online's Instant Messenger and the Microsoft Network Messenger. See instant messaging. Sexually arousing images of children that are not considered pornographic, obscene, or offensive. A networking model in which a collection of nodes (client computers) request and obtain services from a server node (server computer). A file-sharing program based on the Gnutella protocol. Gnutella enables users to directly share files with one another. Unlike Napster, Gnutella- based programs do not rely on a central server to find files. Decentralized group membership and search protocol, typically used for file sharing. Gnutella file-sharing programs build a virtual network of participating users. The standard language (HyperText Markup Language) used to display information on the Web. It uses tags embedded in text files to encode instructions for formatting and displaying the information. A popular method of Internet communication that allows for an instantaneous transmission of messages to other users who are logged into the same instant messaging service. America Online's Instant Messenger and the Microsoft Network Messenger are among the most popular instant messaging programs (see chat). Internet chat application allowing real-time conversations to take place via software, text commands, and channels. Unlike the Web-based IM, IRC requires special software and knowledge of technical commands (see chat). Internet Protocol address. A number that uniquely identifies a computer connected to the Internet to other computers. A file-sharing program using a proprietary peer-to-peer protocol to share files among users on the network. Through a distributed self-organizing network, KaZaA requires no broker or central server like Napster. A file-sharing program running on Gnutella networks. It is open standard software running on an open protocol, free for the public to use. A file-sharing application using the KaZaA peer-to-peer protocol to share files among users on the network. A process whereby one image is gradually transformed into a second image. Moving Pictures Experts Group (MPEG) MPEG-1 Audio Layer-3. A widely used standard for compressing and transmitting music in digital format across Internet. MP3 can compress file sizes at a ratio of about 10:1 while preserving sound quality. Discussion groups on Usenet, varying in topic from technical to bizarre. There are over 80,000 newsgroups organized by major areas or domains. The major domains are alt (any conceivable topic, including pornography); biz (business products and services); rec (games and hobbies); comp (computer hardware and software); sci (sciences); humanities (art and literature); soc (culture and social issues); misc (miscellaneous, including employment and health); and talk (debates on current issues). See Usenet. A computer or a device that is connected to a network. Every node has a unique network address. A network node that may function as a client or a server. In the peer-to- peer environment, peer computers are also called servents, since they perform tasks associated with both servers and clients. A computer that interconnects client computers, providing them with services and information; a component of the client-server model. A Web server is one type of server. Search for extraterrestrial intelligence at home. A distributed computing project, SETI@home uses data collected by the Arecibo Telescope in Puerto Rico. The project takes advantage of the unused computing capacity of personal computers. As of February 2000, the project encompassed 1.6 million participants in 224 countries. The general structure--or map--of a network. It shows the computers and the links between them. A bulletin board system accessible through the Internet containing more than 80,000 newsgroups. Originally implemented in 1979, it is now probably the largest decentralized information utility in existence (see newsgroups). Having the properties of x while not being x. For example, "virtual reality" is an artificial or simulated environment that appears to be real to the casual observer. Internet addressing and naming system. In the peer-to-peer environment, VNS dynamically associates names created by users with the IP addresses assigned by their Internet services providers to their computers. A worldwide client-server system for searching and retrieving information across the Internet. Also known as WWW or the Web.

The availability of child pornography has dramatically increased in recent years as it has migrated from printed material to the World Wide Web, becoming accessible through Web sites, chat rooms, newsgroups, and now the increasingly popular peer-to-peer file-sharing programs. These programs enable direct communication between users, allowing users to access each other's files and share digital music, images, and video. GAO was requested to determine the ease of access to child pornography on peer-to-peer networks; the risk of inadvertent exposure of juvenile users of peer-to-peer networks to pornography, including child pornography; and the extent of federal law enforcement resources available for combating child pornography on peer-to-peer networks. Because child pornography cannot be accessed legally other than by law enforcement agencies, GAO worked with the Customs Cyber-Smuggling Center in performing searches: Customs downloaded and analyzed image files, and GAO performed analyses based on keywords and file names only. In commenting on a draft of this report, the Department of Justice agreed with the report's findings and provided additional information. Child pornography is easily found and downloaded from peer-to-peer networks. In one search using 12 keywords known to be associated with child pornography on the Internet, GAO identified 1,286 titles and file names, determining that 543 (about 42 percent) were associated with child pornography images. Of the remaining, 34 percent were classified as adult pornography and 24 percent as nonpornographic. In another search using three keywords, a Customs analyst downloaded 341 images, of which 149 (about 44 percent) contained child pornography. These results are in accord with increased reports of child pornography on peer-to-peer networks; since it began tracking these in 2001, the National Center for Missing and Exploited Children has seen a fourfold increase--from 156 in 2001 to 757 in 2002. Although the numbers are as yet small by comparison to those for other sources (26,759 reports of child pornography on Web sites in 2002), the increase is significant. Juvenile users of peer-to-peer networks are at significant risk of inadvertent exposure to pornography, including child pornography. Searches on innocuous keywords likely to be used by juveniles (such as names of cartoon characters or celebrities) produced a high proportion of pornographic images: in our searches, the retrieved images included adult pornography (34 percent), cartoon pornography (14 percent), child erotica (7 percent), and child pornography (1 percent). While federal law enforcement agencies--including the FBI, Justice's Child Exploitation and Obscenity Section, and Customs--are devoting resources to combating child exploitation and child pornography in general, these agencies do not track the resources dedicated to specific technologies used to access and download child pornography on the Internet. Therefore, GAO was unable to quantify the resources devoted to investigating cases on peer-to-peer networks. According to law enforcement officials, however, as tips concerning child pornography on peer-to-peer networks escalate, law enforcement resources are increasingly being focused on this area.

The NFIP provides property insurance for flood victims, maps the boundaries of the areas at highest risk of flooding, and offers incentives for communities to adopt and enforce floodplain management regulations and building standards to reduce future flood damage. The effective integration of all three of these elements is needed for the NFIP to achieve its goals. These include: providing property flood insurance coverage for the many property owners who would benefit from such coverage; reducing taxpayer-funded disaster assistance for property damage when flooding strikes; and reducing flood damage to properties through floodplain management that is based on accurate, useful flood maps and the enforcement of relevant building standards. Floods are the most common and destructive natural disaster in the United States. According to NFIP statistics, 90 percent of all natural disasters in the United States involve flooding. Our analysis of FEMA data found that over the past 25 years, about 97 percent of the U.S. population lived in a county that had at least one declared flood disaster, and 45 percent lived in a county that that had six or more flood disaster declarations. However, flooding is generally excluded from homeowner insurance policies that typically cover damage from other losses, such as wind, fire, and theft. Because of the catastrophic nature of flooding and the difficulty of adequately predicting flood risks, as well as the fact that those who are most at risk are the most likely to buy coverage, private insurance companies have largely been unwilling to underwrite and bear the risk of flood insurance. The NFIP was established by the National Flood Insurance Act of 1968 to provide policyholders with some insurance coverage for flood damage, as an alternative to disaster assistance, and to try to reduce the escalating costs of repairing flood damage. In creating the NFIP, Congress found that a flood insurance program with the "large-scale participation of the Federal Government and carried out to the maximum extent practicable by the private insurance industry is feasible and can be initiated." In keeping with this purpose, 92 private insurance companies were participating in the WYO program as of September 2007. NFIP pays these insurers fees to sell and service policies and adjust and process claims. FEMA, which is within the Department of Homeland Security (DHS), is responsible for the oversight and management of the NFIP. We reported in September 2007 that about 68 FEMA employees, assisted by about 170 contract employees, manage and oversee the NFIP and the National Flood Insurance Fund, into which premiums are deposited and claims and expenses are paid. As of April 2007, the NFIP was estimated to have over 5.4 million policies in about 20,300 communities. To ensure that NFIP can cover claims after catastrophic events, FEMA has statutory authority to borrow funds from the Treasury to keep the program solvent. According to FEMA, an estimated $1.2 billion in flood losses are avoided annually because communities have implemented the NFIP's floodplain management requirements. Flood maps identify the boundaries of the areas that are most at risk of flooding. Property owners whose properties are within special flood hazard areas and who have mortgages from a federally regulated lender are required to purchase flood insurance for the amount of their outstanding mortgage balance, up to the maximum policy limit of $250,000 for single-family homes. According to FEMA, Excess Flood Protection coverage above these amounts is available in the private insurance markets. Personal property coverage is available for contents, such as furniture and electronics, for an additional $100,000. Business owners may purchase up to $500,000 of coverage for buildings and $500,000 for contents. The owners of properties with no mortgages or properties with mortgages held by lenders who are not federally regulated are not required to buy flood insurance, even if the properties are in a special flood hazard area. Optional lower-cost coverage is available under the NFIP to protect homes in areas of low to moderate risk. To the extent possible, the NFIP is designed to pay operating expenses and flood insurance claims with premiums collected on flood insurance policies rather than with tax dollars. However, as we have reported, the program, by design, is not actuarially sound because Congress authorized subsidized insurance rates for policies covering some properties in order to encourage communities to join the program. As a result, the program does not collect sufficient premium income to build capital to cover long- term future flood losses. Moreover, the premiums collected are often not sufficient to pay for losses even in years without catastrophic flooding. This shortfall is exacerbated by repetitive loss properties that file repeated claims with NFIP. FEMA's current debt to the Treasury--over $17.5 billion--is almost entirely for payment of claims from the 2005 hurricanes. Legislation increased FEMA's borrowing authority from a total of $1.5 billion prior to Hurricane Katrina to $20.8 billion in March 2006. As we have testified previously, it is unlikely that FEMA will be able to repay a debt of this size and cover future claims, given that the program generates premium income of about $2 billion a year, which must first cover ongoing loss and expenses. To date, the program has gone through almost two full seasons without a major hurricane, and according to FEMA about $524 million of premium income has been used to pay interest on the debt owed to the Treasury in 2006. FEMA officials also noted that because fiscal year 2007 had been a relatively low flood loss year, the agency should be able to pay its next scheduled interest payment from premium income and would not have to borrow additional funds from Treasury to pay interest on its outstanding debt. Attention has been focused on the extent of the federal government's exposure for claims payments in future catastrophic loss years and on ways to improve the program's financial solvency. For example, some in Congress have recommended phasing in actuarial rates for vacation homes and nonresidential properties. About 25 percent of NFIP's over 5.4 million policies have premiums that are substantially less than the true risk premiums. Properties constructed before their communities joined the NFIP and were issued a Flood Insurance Rate Map (or FIRM), which shows the community's flood risk, are eligible for subsidized rates. These policyholders typically pay premiums that represent about 35 to 40 percent of the true risk premium. In January 2006, FEMA estimated a shortfall in annual premium income because of policy subsidies at $750 million. In response to concerns about the historical basis for the subsidies and questions about the characteristics of the homes receiving subsidies, we were asked by the Ranking Member of this committee to collect certain demographic information about the portfolio of subsidized properties and property owners. This work will provide information on residential pre-FIRM subsidized properties in selected counties of the country. To the extent that reliable data is available, we plan to capture the variations that exist by type of flooding (e.g., coastal or riverine), fair market values for subsidized and nonsubsidized properties in each location, average income levels for each county, claims data for subsidized and nonsubsidized properties in each location, and the mitigation efforts being used. Our work will build upon the work of the Congressional Budget Office on values of properties in the NFIP. As part of this review, we are also examining the extent to which FEMA's nonsubsidized rates are truly actuarially based. We will assess how NFIP sets rates for its nonsubsidized and subsidized premiums, determine the total premiums the NFIP collects, and compare that amount to claims and related costs. Our analysis of FEMA's premiums and claims data should help provide insights into how FEMA sets rates. We also have work under way that will provide a description of financial and statistical trends, by flood zone, for the past 10 years. Specifically, we have been asked to describe average premium and claim amounts by flood zone, FEMA's estimates of likely losses, and the extent to which losses are attributable to repetitive loss properties or hurricanes. We will also describe the extent to which flood-damaged properties have been purchased through NFIP-funded mitigation programs. However, our ability to report on these issues will depend on the quality of FEMA's claims data. Finally, we are evaluating the adequacy of FEMA's procedures for monitoring selected contracts that support the NFIP. In reauthorizing the NFIP in 2004, Congress noted that repetitive loss properties--those that had resulted in two or more flood insurance claims payments of $1,000 or more over 10 years--constituted a significant drain on the resources of the NFIP. These repetitive loss properties are problematic not only because of their vulnerability to flooding, but also because of the costs of repeatedly repairing flood damages. Although these properties account for only about 1 percent of NFIP-covered properties, they account for between 25 and 30 percent of claims. As of September 2007 over 70,000 repetitive loss properties were insured by the NFIP. The 2004 Flood Insurance Reform Act authorized a 5-year pilot program to encourage mitigation efforts on severe repetitive loss properties in the NFIP. According to FEMA, as of September 2007 about 8,100 properties insured by the NFIP were categorized as severe repetitive loss properties. Under the pilot, FEMA is required to adjust its rules and rates to ensure that homeowners pay higher premiums if they refuse an offer to mitigate the property. The pilot program was funded in fiscal year 2006, and according to FEMA officials, FEMA has not yet developed the regulations, guidance, and administrative documents necessary for implementation. FEMA is also creating a new generation of properties that may not pay risk-based premiums. Properties that are remapped into higher flood risk areas may be able to keep or "grandfather" the nonsubsidized rates associated with their risk level prior to being remapped into a higher flood risk area. As a result, eligible property owners who have an existing policy or who purchase new flood insurance policies before they are mapped into higher-risk areas will go on paying the same nonsubsidized premium rate. Moreover, these grandfathered rates can be permanent. Although this option is a major selling point of encouraging broader participation in the program, such actions may further erode the actuarial soundness and financial stability of the program. From 1968 until the adoption of the Flood Disaster Protection Act of 1973, buying flood insurance was voluntary. However, voluntary participation in the NFIP was low, and many flood victims did not have insurance to repair damages from floods in the early 1970s. In 1973 and again in 1994, Congress enacted laws requiring that some property owners in special flood hazard areas buy NFIP insurance. The owners of properties with no mortgages or properties with mortgages held by lenders that were not federally regulated were not, and still are not, required to buy flood insurance, even if the properties are in special flood hazard areas. As we have reported in the past, viewpoints differ about whether lenders were complying with the flood insurance purchase requirements, primarily because the officials we spoke with did not use the same types of data to reach their conclusions. For example, federal bank regulators and lenders based their belief that lenders were generally complying with the NFIP's purchase requirements on regulators' examinations and reviews that were conducted to monitor and verify lender compliance. In contrast, FEMA officials believed that many lenders frequently were not complying with the requirements, an opinion that they based largely on estimates computed from data on mortgages, flood zones, and insurance policies; limited studies on compliance; and anecdotal evidence indicating that insurance was not always purchased when it was required. At the time of our report in 2002, neither side was able to substantiate these claims with statistically sound data. However, a FEMA-commissioned study of compliance with the mandatory purchase requirement estimated that compliance with purchase requirements, under plausible assumptions, was 75 to 80 percent in special flood hazard areas for single-family homes that had a high probability of having a mortgage. The analysis conducted did not provide evidence that compliance declined as mortgages aged. At the same time, the study showed that about half of single-family homes in special flood hazard areas had flood insurance. The 2006 study also found that while one-third of NFIP policies were written outside of special flood hazard areas, the market penetration rate was only about 1 percent. Yet according to FEMA about half of all flood damage occurs outside of high risk areas. FEMA has efforts under way to increase participation by improving the quality of information that is available on the NFIP and on flood risks and by marketing to retain policyholders currently in the program. In October 2003, FEMA contracted for a new integrated mass marketing campaign called "FloodSmart" to educate the public about the risks of flooding and to encourage the purchase of flood insurance. Marketing elements being used include direct mail, national television commercials, print advertising, and Web sites that are designed for communities, consumers, and insurance agents. According to FEMA officials, in the little more than 3 years since the contract began, net policy growth has been almost 24 percent, and policy retention has improved from 88 percent to almost 92 percent. However, the success of the program will be measured by retention rates as policyholders' memories of the devastation from Hurricane Katrina begin to fade over time. Accurate flood maps that identify the areas that are at greatest risk of flooding are the foundation of the NFIP. These maps, which show the extent of flood risk across the country, allow the program to determine high-risk areas for designation both as special hazard zones and as areas that can benefit the most from mitigation. Flood maps must be periodically updated to assess and capture changes in the boundaries of floodplains resulting from community growth, development, erosion, and other factors that affect the boundaries of areas at risk of flooding. The maps are principally used by (1) the communities participating in the NFIP, to adopt and enforce the program's minimum building standards for new construction within the maps' identified floodplains; (2) FEMA, to develop flood insurance policy rates based on flood risk; and (3) federal regulated mortgage lenders, to identify those property owners who are statutorily required to purchase federal flood insurance. As we reported in 2004, FEMA has embarked on a multiyear effort to update the nation's flood maps at a cost in excess of $1 billion. At that time we noted that NFIP faced major challenges in working with its contractor and state and local partners to produce accurate digital flood maps. FEMA has taken steps to improve these working relationships by developing a number of guidelines and procedures. According to FEMA, the agency has developed a plan for prioritizing and delivering modernized maps nationwide, including developing risk-based mapping priorities. Moreover, FEMA has recognized that a maintenance program will be needed to keep the maps current and relevant. For example, several strategies are under consideration for maintaining map integrity, including reviewing the flood map inventory every 5 years, as required by law; updating data and maps more regularly, as needed; addressing any unmet flood mapping needs and assessing the quality and quantity of maps; and examining risk management more broadly. However, the effectiveness of these strategies will depend on available funding and FEMA's ongoing commitment to ensuring the integrity of the maps. As of September 2007 FEMA had remapped 34 percent of its maps. To meet its monitoring and oversight responsibilities, FEMA is required to conduct periodic operational reviews of the private insurance companies that participate in the WYO program. In addition, FEMA's program contractor is required to check the accuracy of claims settlements by doing quality assurance reinspections of a sample of claims adjustments for every flood event. For operational reviews, FEMA examiners must thoroughly examine the companies' NFIP underwriting and claims settlement processes and internal controls, including checking a sample of claims and underwriting files to determine, for example, whether a violation of procedures has occurred, an incorrect payment has been made, or a file does not contain all required documentation. Separately, FEMA's program contractor is responsible for conducting quality assurance reinspections of a sample of claims adjustments for specific flood events in order to identify, among other things, expenses that were paid that were not covered and covered expenses that were not paid. In our December 2006 report, we found that a new claims handling process aided the claims handling following the 2005 hurricane season and resulted in few complaints. As a result, 95 percent of claims were closed by May 2006, a time frame that compared favorably with those of other, smaller recent floods. However, we noted that FEMA had not implemented a recommendation from a prior report that it do quality reinspections based on a random sample of all claims. We also found that FEMA had not analyzed the overall results of the quality reinspections following the 2005 hurricane season. In response, FEMA has agreed to (1) analyze the overall results of the reinspection reports on the accuracy of claims adjustments for future events, and (2) plan its reinspections based on a random sample of claims. FEMA faces challenges in providing effective oversight of the insurance companies and thousands of insurance agents and claims adjusters that are primarily responsible for the day-to-day process of selling and servicing flood insurance policies. For example, as we reported in September 2007, 94 WYO insurance companies had written 96 percent of the flood insurance policies for the NFIP as of December 2006, up from the 48 companies that were writing 50 percent of the policies in 1986. We also reported that for fiscal years 2004 through 2006, total operating costs that FEMA paid to the WYO insurance companies ranged from $619 million to $1.6 billion, or from more than a third to almost two-thirds of the total premiums paid by policyholders to the NFIP, as a result of unprecedented flood losses caused by the 2005 hurricanes. FEMA regulations require each participating company to arrange and pay for audits by independent certified public accounting firms. However, many WYO insurance companies have not complied with the schedule in recent years. For example, for fiscal years 2005 and 2006, 5 of 94 participating companies had biennial financial statement audits performed. In response to our recommendations, FEMA has agreed to take steps to ensure that it has reasonable estimates of the actual expenses that WYO insurance companies incurred to help determine whether payments for services are appropriate and that required financial audits are performed. Building on this body of work, we are beginning a follow-up engagement that will analyze the expenses WYO insurance companies incur from selling and servicing NFIP policies and determine whether the total operating costs paid to the companies are equitable relative to those costs. We will also examine how FEMA oversees the WYO program, including reinspecting claims and performing operational reviews. Finally, we will evaluate alternatives for selling and servicing flood insurance policies and processing claims. We are also completing an engagement that looks at the inherent conflict of interest that exists when a WYO insurance company sells both property- casualty and flood policies to a single homeowner who is subject to a multiple peril event such as a hurricane. We testified before the House Committees on Financial Services and Homeland Security in June 2007 about our preliminary views on the sufficiency of data available to and collected by FEMA to ensure the accuracy of claims payments. FEMA has determined that it does not have the authority to collect wind damage claims data from WYO insurance companies, even when the insurer services both the wind and flood policies on the same property. Hence, FEMA generally does not know the extent to which wind may have contributed to total property damages. However, FEMA officials do not believe that the agency needs to know the dollar amount of wind damages paid by a WYO insurance company to verify the accuracy of a flood claim. While they may not need this information for many flood claims, the inherent conflict of interest that exists when a single WYO insurance company is responsible for adjusting both the wind and flood claim on a single property calls for the institution of strong internal controls to ensure the accuracy of FEMA's claims payments. Without internal controls that include access to the entire claim file for certain properties (both wind and flood), FEMA's ability to confirm the accuracy of certain flood claims may be limited. While the DHS Inspector General is currently examining this issue by reviewing both wind and flood claims on selected properties. Its interim report, issued in July 2007, was generally inconclusive. As our prior work reveals, FEMA faces a number of ongoing challenges in managing the NFIP that, if not addressed, will continue to threaten the program's financial solvency even if the program's current debt is forgiven. As we noted when we placed the NFIP on the high-risk list in 2006, comprehensive reform will likely be needed to stabilize the long-term finances of this program. Our ongoing work is designed to provide FEMA and Congress with useful information to help assess ways to improve the sufficiency of NFIP's financial resources and its current funding mechanism, mitigate expenses from repetitive loss properties, increase compliance with mandatory purchase requirements, and expedite FEMA's flood map modernization efforts. As you well know, placing the program on more sound financial footing involves a set of highly complex, interrelated issues that are likely to involve many trade-offs. For example, increasing premiums to better reflect risk would put the program on a sounder financial footing but could also reduce voluntary participation in the program or encourage those who are required to purchase flood insurance to limit their coverage to the minimum required amount (i.e., the amount of their outstanding mortgage balance). As a result, taxpayer exposure for disaster assistance resulting from flooding could increase. As we have said before, meeting the NFIP's current challenges will require sound data and analysis and the cooperation and participation of many stakeholders. Mr. Chairman and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions you and the Committee Members may have. Contact point for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact Orice M. Williams at (202) 512-8678 or [email protected]. This statement was prepared under the direction of Andy Finkel. Key contributors were Emily Chalmers, Martha Chow, Nima Patel Edwards, Grace Haskins, Lisa Moore, and Roberto Pinero. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The National Flood Insurance Program (NFIP), established in 1968, provides property owners with some insurance coverage for flood damage. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security is responsible for managing the NFIP. Given the challenges facing the NFIP and the need for legislative reform to ensure the financial stability and ongoing viability of this program, GAO placed the NFIP on its high-risk list in March 2006. This testimony updates past work and provides information about ongoing GAO work on issues including (1) NFIP's financial structure, (2) the extent of compliance with mandatory requirements, (3) the status of map modernization efforts, and (4) FEMA's oversight of the NFIP. Building on our previous and ongoing work on the NFIP, GAO collected data from FEMA to update efforts, including information about claims, policies, repetitive loss properties, and mitigation efforts. The most significant challenge facing the NFIP is the actuarial soundness of the program. As of August 2007, FEMA owed over $17.5 billion to the U.S. Treasury. FEMA is unlikely to be able to pay this debt, primarily because the program's premium rates have been set to cover an average loss year, which until 2005 did not include any catastrophic losses. This challenge is compounded by the fact that some policyholders with structures that were built before floodplain management regulations were established in their communities generally pay premiums that represent about 35 to 40 percent of the true risk premium. Moreover, about 1 percent of NFIP-insured properties that suffer repetitive losses account for between 25 and 30 percent of all flood claims. FEMA is also creating a new generation of "grandfathered" properties--properties that are mapped into higher-risk areas but may be eligible to receive a discounted premium rate equal to the nonsubsidized rate for their old risk designation. Placing the program on a more sound financial footing will involve trade-offs, such as charging more risk-based premiums and expanding participation in the program. The NFIP also faces challenges expanding its policyholder base by enforcing compliance with mandatory purchase requirements and promoting voluntary purchase by homeowners who live in areas that are at less risk. One recent study estimated that compliance with the mandatory purchase requirement was about 75 to 80 percent but that penetration elsewhere in the market was only 1 percent. Since 2004, FEMA has implemented a massive media campaign called "FloodSmart" to increase awareness of flooding risk nationwide by educating everyone about the risks of flooding and encouraging the purchase of flood insurance. While the numbers of policyholders increased following Hurricane Katrina, it is unclear whether these participants will remain in the program as time goes on. The impact of the 2005 hurricanes highlighted the importance of up-to-date flood maps that accurately identify areas at greatest risk of flooding. These maps are the foundation of the NFIP. In 2004 FEMA began its map modernization efforts, and according to FEMA, about 34 percent of maps have been remapped. Completing the map modernization effort and keeping these maps current is also going to be an ongoing challenge for FEMA. Finally, FEMA also faces significant challenges in providing effective oversight over the insurance companies and thousands of insurance agents and claims adjusters who are primarily responsible for the day-to-day process of selling and servicing flood insurance policies. As GAO recommended in a an interim report issued in September 2007, FEMA needs to take steps to ensure that it has a reasonable estimate of actual expenses that the insurance companies incur to help determine whether payments for services are appropriate and that required financial audits are performed. GAO, in its ongoing work, plans to further explore FEMA oversight of the private insurance companies and the cost of selling and servicing NFIP flood policies.

FFRDCs are private sector organizations funded primarily by federal agencies to meet a special long-term research and development need that cannot be met as effectively by existing in-house or contractor resources. One federal agency serves as the primary sponsor of the FFRDC and signs an agreement specifying the purpose, terms, and other provisions for the FFRDC's existence. Agreement terms cannot exceed 5 years but can be extended after a review by the sponsor of the continued use and need for the FFRDC. Federal regulations state that an FFRDC is required to conduct its business in a manner befitting its special relationship with the government, operate in the public interest with objectivity and independence, be free from organizational conflicts of interest, and have full disclosure of its affairs to the sponsoring agency. The Aerospace Corporation is a private, nonprofit mutual benefit corporation created in 1960. Aerospace's primary purpose is to provide scientific and engineering support for the U.S. military space program. Aerospace operates an FFRDC in support of U.S. national security space programs pursuant to the Federal Acquisition Regulation (FAR), and its primary sponsor is the Air Force. Aerospace is governed by a 16-member Board of Trustees in accordance with its articles of incorporation and bylaws. The Air Force Space and Missile Systems Center (SMC), a part of the Air Force Materiel Command, has day-to-day management responsibility over the FFRDC. Through fiscal year 1994, SMC negotiated annual cost-plus-fixed-fee contracts with Aerospace. In fiscal year 1995, it began operating under a cost-plus-award-fee contract where the amount of fee is based on Aerospace's performance. Table 1 shows the contract costs and fees awarded to Aerospace between fiscal years 1989 and 1994. Although SMC is the primary customer, Aerospace also performs work for other U.S. government agencies, international organizations, and foreign governments. In fiscal year 1993, for example, Aerospace's reported revenues totaled $422.2 million, of which 97.4 percent came from the Air Force and other DOD agencies; 2.2 percent from other federal agencies, such as the National Aeronautics and Space Administration; and 0.4 percent from nonfederal government sources, such as universities and foreign governments. The Office of Federal Procurement Policy Letter 84-1, dated April 1984, established governmentwide policies for the establishment, use, review, and termination of the sponsorship of FFRDCs. It provides that the conditions affecting the negotiation of fee should be identified in the contract, sponsoring agreement with the FFRDC, or the sponsoring agency's policies and procedures, as appropriate. The FAR also requires that the sponsoring agreement or the sponsoring agency's policies and procedures identify the considerations that will affect the negotiation of fee when fee is determined to be appropriate. The Defense Acquisition Regulation Supplement (DFARS) provides more specific guidance for determining whether a fee is appropriate and how the fee is to be determined. Since FFRDCs may incur expenses that are unreimbursable under federal regulations, the DFARS allows for a fee to cover unreimbursed expenses if they are deemed ordinary and necessary to the FFRDC. An SMC contracting office instruction provides the fee determination procedures to be used on the Aerospace contract. It states that the fee is to be based on a need that must be justified and that the fee must be used for the purposes awarded. In fiscal year 1993, Aerospace reported that it used about $11.5 million of the $15.5 million Air Force contract fee to sponsor research. It used the remainder of the fee, along with other corporate resources, for capital equipment purchases, real and leasehold property improvements, and other unreimbursed expenditures. According to Aerospace officials, the fee from Air Force contracts is combined with funds from other sources in Aerospace's accounting records. Therefore, it is not possible to link each specific use of Aerospace's funds to the specific funding source. However, Aerospace and SMC have a general understanding that sponsored research is to be paid from the Air Force contract fee. Also, the accounting standards and principles governing Aerospace do not require it to match funding use with funding source. Table 2 shows Aerospace's actual sources and applications of funds in fiscal year 1993. Aerospace used the Air Force fee primarily to sponsor research with broader and longer term goals than the more immediate, direct goals of individual Air Force program offices. In fiscal year 1993, Aerospace spent about $11.5 million, or 74 percent, of the Air Force fee for sponsored research. According to Aerospace officials, these funds were used for research in such areas as electronic device technology, surveillance, and information sciences. They added that sponsored research has resulted in cost savings for the Air Force space program. For example, Aerospace attributed to such research a 50-percent increase in the life expectancy of satellite sensors in the Defense Meteorological Satellite Program. It credited such research with developing remedial procedures to extend the life of satellite batteries, which have historically contributed to limiting the life of the satellite. Aerospace also cited many other research benefits, such as combining missions on a single spacecraft system and using commercial parts and techniques. One long-standing FFRDC issue has been whether to fund sponsored research as a cost-reimbursable item or out of fee. A 1962 report to the President on government contracting for research and development, known as the Bell report, supported the continuation of fee payments for research because most nonprofit organizations must conduct some independent, self-initiated research if they are to attract and retain staff.On the other hand, an August 1965 congressional report on Aerospace noted that some research would normally be a reimbursable expense and therefore all of the research could be provided under reimbursement.Similarly, in December 1994, the DOD Inspector General concluded that FFRDC-sponsored research should be reimbursed as contract costs to the extent that is allowable and reasonable. Most recently, in May 1995, a DOD study, completed at the direction of the Congress, focused on ways to limit the use of fee. It recommended that all allowable and allocable costs, including research, be considered as reimbursable costs rather than paid from fee. Although Aerospace believes that either funding approach is correct, it believes that research is best funded using fee rather than being reimbursed as a cost item. It said that making research a cost-reimbursable item would decrease the responsibility of Aerospace management and the Board of Trustees over independent research and increase administrative burden. Also, Aerospace expressed concern that Air Force program managers may not want to fund certain research because these managers may have more immediate goals than those for Aerospace's research program. Air Force officials said they acknowledged Aerospace's expertise and plan to use it to the maximum extent possible regardless of the funding mechanism. Reimbursing research as a cost item would not necessarily reduce total Air Force contract costs, according to DOD. However, it would subject all research to the FAR cost principles applicable to cost-reimbursable items. Regardless of how Aerospace's research program is funded, Air Force and Aerospace officials acknowledged that the program's effectiveness in meeting Air Force needs could be improved. Air Force officials said that the benefits from research could be increased by strengthening Air Force and Aerospace coordination on project selection. According to Aerospace, the effectiveness of the program will be improved as a result of recent steps taken to improve the research selection process. These include (1) a formal collection of prioritized Air Force Technology Need Statements, (2) Air Force participation on Aerospace's Technical Program Committee, and (3) a formal briefing by Aerospace to the Air Force demonstrating the relationship between selected research projects and the Air Force's prioritized technology needs. In fiscal year 1993, Aerospace spent $18.1 million of its working capital funds for capital equipment ($14.3 million) and for real and leased property improvements ($3.8 million). Aerospace officials said these expenditures were funded from reimbursements for depreciation and amortization ($14.5 million) and the Air Force contract fee ($3.6 million). The FAR allows as reimbursable costs depreciation of capital equipment and amortization of real property and leasehold improvements. SMC defines capital equipment as an asset that has an estimated useful life of over 2 years and a cost of $1,500 or more. It includes those items that Aerospace generally uses to support Air Force contracts but are not purchased in direct support of an individual project, such as computer hardware and bundled software and laboratory diagnostic and test tools. Capital equipment used in direct support of an individual Air Force project is charged as other direct costs in the year acquired rather than depreciated. DOD's May 1995 report to the Congress recommended requiring FFRDCs to submit an annual 5-year capital acquisition plan. According to Aerospace, such a plan may be impracticable due to rapid changes in personnel, technology, and equipment. Real and leasehold property improvements include building rehabilitation projects, building equipment replacement, security and safety requirements, new operational requirements, and seismic upgrades to meet earthquake protection standards. On the Aerospace contract, leasehold amortization has been a reimbursable cost, whereas building depreciation has been funded primarily through the Air Force contract fee and other corporate funds. In fiscal year 1993, Aerospace spent $1.9 million from fee and other corporate funds on unreimbursed costs, that it considered ordinary and necessary to the FFRDC. Some of these expenses were for contributions, travel in excess of per diem, spouse and guest meals, personal use of company-furnished automobiles, and advertising. Table 3 summarizes Aerospace's unreimbursed expenditures in fiscal year 1993. According to Aerospace officials, new business expenses are incurred to broaden Aerospace's involvement in non-DOD business to provide employment and operational stability for Aerospace during periods of declining DOD budgets. The officials said more non-DOD business was needed because it has been impossible for Aerospace to maintain employment stability in an environment of budget ceilings and reduced DOD funding. Further, they said that broadening the corporation's non-DOD business base helps slow attrition and retain the skills and capabilities needed to support the Air Force's space mission. Aerospace noted that employment has declined by 27 percent since 1990. Aerospace believes that inadequate staffing levels could increase the risk of an expensive program failure, which could lead to a serious degradation of national security readiness. Aerospace also said a broader business base also reduces the overhead costs allocated to Air Force contracts. According to Aerospace, the precedent for new business development was set in the late 1960s. At the time, DOD encouraged FFRDCs to make their services available to other government agencies so that they would transfer their technical expertise to the civilian sector. SMC officials recognize the benefits of new business development expenses in retaining Aerospace's core capabilities and reducing overhead costs. As a result, the officials said they negotiated reasonable and cost-effective limits on new business expenses in the contracts with Aerospace. For example, they agreed to provide $400,000 for cost-reimbursable, new business expenses in fiscal year 1993. The officials said they made clear to Aerospace that any new business expenses in excess of the contract limit were not reimbursable and could not be charged to the Air Force contract fee. However, such restrictions were not expressly incorporated into Aerospace's contract. In addition to the $400,000, Aerospace spent $551,500 on new business expenses. Aerospace officials said that $521,500 came from corporate funds other than the Air Force contract fee and $30,000 was charged directly to other contracts. Table 4 shows the new business expenses incurred by Aerospace during fiscal years 1990 through 1994. For fiscal year 1995, Aerospace proposed $2.5 million in cost-reimbursable new business expenses and $400,000 for bid and proposal expenses. Aerospace officials said that allocating about 1 percent of its contracts' value for new business was not unreasonable given the continued reduction in budget ceilings; the government's commitment in the sponsoring agreement to a special, long-term relationship; and the avoidance of costs associated with potential reductions in force. SMC officials said they negotiated into the contract a cost-reimbursable amount of $1.2 million for both new business expenses and bid and proposal expenses, which they believed was an appropriate amount for the anticipated benefits to the Air Force. Air Force Headquarters officials indicate that they intend to tightly control all non-FFRDC/non-DOD business activities of Aerospace. Aerospace officials said contributions help in hiring quality employees, advancing affirmative action goals, and maintaining favorable relationships within the community. Major cash contributions were broadly categorized as either "community affairs participation" or "gift matching program," and Aerospace spent $307,000 and $255,000 for these categories, respectively, in fiscal year 1993. Under the FAR, contributions generally are not reimbursable costs. Accordingly, Aerospace's contributions were not reimbursed as cost items but were funded from its corporate funds, which included the Air Force fee. Aerospace officials said contributions were ordinary and necessary business expenditures that were fully disclosed to the Air Force. As a result of restrictions on charitable contributions contained in the fiscal year 1995 National Defense Authorization Act, Aerospace and SMC agreed that Aerospace would not make any further charitable contributions from funds obtained from DOD. This agreement was incorporated in the fiscal year 1995 contract. Miscellaneous expenditures from corporate funds totaled $308,000 for fiscal year 1993 and included $58,700 for the personal use of company cars, $143,100 for conference meals and trustee expenses, and $106,200 for other expenses. Aerospace corporate officers were provided company cars. The FAR states that the costs of automobiles owned or leased by the contractor are allowable if they are reasonable and the cars are used for company business. Costs relating to the personal use of vehicles by employees (including transportation to and from work) are unallowable. According to Aerospace, the $58,700 charged to corporate funds for the personal use of company cars was primarily for transportation to and from work and was reported as taxable employee income. Unreimbursed conference meals and trustee expenses of $143,100 in fiscal year 1993 included unallowable costs, such as meals for spouses and guests, that were incurred at trustee and other meetings. For example, Aerospace included unreimbursed costs of over $4,000 for 36 spouses and guests at the Collier Award banquet for the Air Force/industry team that developed the Global Positioning System, of which Aerospace was a key member. Aerospace said these unreimbursed expenses of $143,100 were ordinary and necessary. Similar expenditures also were incurred in fiscal year 1994, including bar charges of $1,764 for 63 people, at a dinner reception during a trustee meeting in March 1994. Aerospace also incurred $106,200 for other miscellaneous expenditures in fiscal year 1993 that included advertising, employee recreation activities, and donations of capital equipment. Aerospace said travel expenditures in excess of per diem rates included $25,000 for airline coupons used to provide business and first-class upgrades for its corporate officers. Under the FAR, airfare costs in excess of the lowest customary standard coach or equivalent airfare offered during normal business hours are generally unallowable for cost reimbursement. Accordingly, Aerospace did not submit the costs of upgrades as cost-reimbursable items, although it obtained SMC approval in 1992 to upgrade to business-class air accommodations for corporate officers on trips longer than 2 hours. SMC accepted Aerospace's justification that these upgrades would enhance officers' productivity. SMC officials said they might need to reevaluate whether airline upgrades should be cost-reimbursable items due to DOD's study to limit fee and new federal guidelines on travel costs. Interest expense at Aerospace amounted to $22,000 in fiscal year 1993. Although neither the FAR nor DFARS specifically defines what are ordinary and necessary expenses for FFRDCs, the contract operating instruction at SMC cites interest expense as an example of an unallowable but ordinary and necessary cost of FFRDC operations. For purposes of this report, sundry includes $422,000 in costs for (1) certain executive salary and benefits, (2) relocation and special recruiting expenses, (3) achievement awards, (4) educational assignments, and (5) bids and proposals. According to Aerospace, some of these costs are allowable for cost reimbursement under the FAR. However, Aerospace said it paid the costs out of corporate funds to avoid potential controversies with the Air Force or the Defense Contract Audit Agency regarding the costs' allowability. For example, through fiscal year 1993, Aerospace charged to corporate funds the portion of the president/chief executive officer's salary that exceeded the salary for Executive Schedule Level II. Aerospace said it charged the president/chief executive officer's entire salary as a cost-reimbursable item in fiscal year 1994. Existing federal regulations provide general guidance regarding how fee is to be determined, but do not restrict how a fee may be used nor define what are ordinary and necessary expenses. Further, neither the Air Force sponsoring agreement with Aerospace nor the annual contract specify how a fee may be used. Although the Air Force and Aerospace discuss Aerospace's need for fee and planned use of fee by cost category, Aerospace exercises some discretion in spending the fee and determining what expenditures funded from fee are ordinary and necessary. Since Aerospace's fee is based on its need, the manner in which Aerospace uses its corporate resources, including fee, in any one year may affect its need for an Air Force fee in the following year. Aerospace stated that even though it has discretion regarding the use of all corporate resources, including Air Force fee, it attempts to use the resources in a manner that is consistent with the plan presented to the Air Force. Aerospace officials told us they recognize that if Aerospace used its resources in a manner that was inconsistent with the plan discussed with the Air Force, the Air Force might attempt to negotiate a reduced fee in subsequent years. In this regard, Air Force officials told us Aerospace has an inherent responsibility to spend its fee in accordance with the justification of its need, even though it is not specifically required by the contract to do so. In establishing the fee provided to defense FFRDCs, the DFARS says that consideration should be given to funding unreimbursed costs deemed ordinary and necessary to the FFRDC. DOD's May 1995 report on FFRDC fee management recognized that the guidance in the FAR and DFARS concerning the granting of FFRDC fees is not clear about what unreimbursed costs are considered ordinary and necessary to FFRDC operations. The report recommended that new guidance be developed and that the use of the undefined and ambiguous term "ordinary and necessary" be avoided. The report also recognized the need for specific examples of appropriate fee use. Implementing this recommendation should provide the Air Force with a better basis for negotiating fee award. An agreed-upon definition of ordinary and necessary expenses would assist contracting officers in resolving issues with other defense FFRDCs. However, as long as moneys provided through Air Force fee are commingled with other funding sources, the Air Force may have difficulty determining how Aerospace used its FFRDC fee. In commenting on a draft of this report, DOD stated that it did not dispute the facts contained in the report and indicated that the report would be helpful in the ongoing DOD efforts to strengthen FFRDC oversight and use of management fees. However, DOD said that none of the data in the report represented improper or illegal activity, as defined by existing statute or regulation, on the part of DOD or Aerospace. DOD further commented that it was taking positive steps to improve its FFRDC fee management process. For example, it said that in the fiscal year 1996 Aerospace contract, the Air Force would address specific uses of fee, such as personal use of cars and travel-related items, through contract provisions or by disallowing the expense. Further, DOD said it was actively working to improve the fee management process based on the findings and recommendations made in DOD's May 1995 report on fee management, as well as work done by us and the DOD Inspector General. DOD's comments are included in their entirety in appendix I. Aerospace provided specific language clarifications. These changes were incorporated where appropriate. We examined Aerospace's proposed fee expenditures and the Air Force's and Defense Contract Audit Agency's evaluations of Aerospace's proposals, including audit reports, supporting workpapers, technical evaluations, and Air Force's price negotiation memorandums. We also examined documentation supporting the nature and purpose of selected actual fee expenditures. Further, we obtained the views of Aerospace's officials and cognizant Defense Contract Audit Agency and Air Force program and contracting officials at Aerospace on factors affecting the use of fee. To determine the regulatory requirements governing the determination and use of fee, we reviewed applicable Office of Federal Procurement Policy guidance; FAR and DFARS provisions; Air Force operating instructions and procedures; and Air Force correspondence, contracts, and sponsoring agreement with Aerospace. We reviewed Aerospace's use of fee for fiscal year 1993 because, at the time we began our work, it was the most recently completed year for which Aerospace had submitted its schedule of unreimbursed expenditures. We also exchanged information with DOD staff involved in the congressionally mandated DOD study on FFRDC fees during their study of the current fee determination process and fee management issues. We conducted our work from October 1994 to July 1995 in accordance with generally accepted government auditing standards. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the Secretary of Defense; the Director, Office of Management and Budget; the Administrator, Office of Federal Procurement Policy; and other interested congressional committees. Copies will also be available to others upon request. Please contact me at (202) 512-4587 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. Odi Cuero Benjamin H. Mannen Amborse A. McGraw 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 how the Aerospace Corporation used a $15.5-million contract fee provided by the Air Force in fiscal year 1993 to operate a federally funded research and development center (FFRDC), focusing on the regulatory requirements governing the determination and use of this fee. GAO found that: (1) Aerospace spent $11.5 million, or 74 percent, of its $15.5-million fee for research; (2) Aerospace spent the remaining $4 million for capital equipment purchases, real and leasehold property improvements, and unreimbursed expenses; (3) even though the Air Force and Aerospace discuss Aerospace's specific fee needs and intended use as a basis for fee award, the contract contains the total fee amount; (4) once the Air Force awards the fee, Aerospace exercises some discretion over how to spend it and other sources of corporate funds, such as interest income and fee from other contracts; (5) the manner in which Aerospace spends its corporate funds in a given year can affect how much Air Force fee is needed in the following year; (6) in May 1995, the Department of Defense (DOD) issued a report to the Congress on fee management at defense FFRDCs; (7) the report focused on ways to limit the use of fee and recommended, among other things, that: (a) defense FFRDC fee amounts be based on the contracting officer's determination of fee need and not on the application of weighted guidelines; (b) all allowable and allocable costs be moved from fee to the cost reimbursement portion of the contract; and (c) guidance be developed regarding what costs are to be considered ordinary and necessary to the operation of an FFRDC; and (8) DOD has indicated that it is working to improve the fee management process based on these recommendations, as well as the most recent GAO and DOD Inspector General work on this issue.

information, raising concern over issues related to privacy and confidentiality. The federal system of protections was developed largely in response to biomedical and behavioral research that caused harm to human subjects. To protect the rights and welfare of human subjects in research, the Common Rule requires organizations conducting federally supported or regulated research to establish and operate IRBs, which are, in turn, responsible for implementing federal requirements for research conducted at or supported by their institutions. IRBs are intended to provide basic protections for people enrolled in federally supported or regulated research. Most of the estimated 3,000 to 5,000 IRBs in the United States are associated with a hospital, university, or other research institution, but IRBs also exist in managed care organizations (MCO), government agencies, and as independent entities employed by the organizations conducting the research. IRBs are made up of both scientists and nonscientists. The organizations that we contacted primarily conduct health research to advance biomedical science, understand health care use, evaluate and improve health care practices, and determine patterns of disease. These organizations use health-related information on hundreds of thousands, and in some cases millions, of individuals in conducting their research. The MCOs and integrated health systems in our study use medical records data, which are generated in the course of treating patients, to conduct epidemiological research and health services research, such as outcomes and quality improvement studies. For example, one MCO, in conducting a quality improvement study, determined from its claims database whether patients with vascular disease were receiving appropriate medications and reported the findings to patients' physicians to assist in the treatment of their patients. The pharmaceutical and biotechnology companies that we contacted also conduct health services and epidemiological research; but unlike MCOs and integrated health systems, they rely on data from other organizations for this type of research. One pharmaceutical company's epidemiology department, for example, conducts large-scale studies using data from MCOs and health information organizations to monitor the effectiveness of drugs on certain populations. For pharmacy benefit management (PBM) firms, which administer prescription drug benefits for health insurance plans, a primary source of data is prescription information derived from prescriptions dispensed by mail or claims received from retail pharmacies. PBMs design and evaluate programs that are intended to improve the quality of care for patients who have specific diseases or risk factors while controlling total health care costs. One PBM in our study, for example, develops disease management programs; these programs depend on the ability to identify individuals with conditions, such as diabetes, that require more intensive treatment management. The health information organizations that we contacted rely solely on data from other organizations. Typically, they collect medical claims data from their clients or obtain it from publicly available sources, such as Medicare and Medicaid. They may also acquire data through employer contracts that stipulate that all the employers' plans provide complete data to a health information organization. Examples of research projects include studies of the effects of low birth weight on costs of medical care and the effectiveness of alternative drug therapies for schizophrenia. Officials at the organizations we contacted believe that many of these studies require personally identifiable information to ensure study validity or to simply answer the study question. For longitudinal studies, researchers may need to track patients' care over time and link events that occur during the course of treatment with their outcomes. Researchers may also need to link multiple sources of information, such as electronic databases and patient records, to compile sufficient data to answer the research question. For example, officials at one health information organization stated that without patient names or assigned patient codes, it would not have been possible to complete a number of studies, such as the effects of length-of-hospital stay on maternal and child health following delivery and patient care costs of cancer clinical trials. Some of the research conducted by the organizations we contacted must conform to the Common Rule or FDA regulations because it is either supported or regulated by the federal government. Several MCOs obtain grants from various federal agencies, including the Centers for Disease Control and Prevention; one health information organization that we contacted conducts research for federal clients, such as the Agency for Health Care Policy and Research. Some organizations that conduct both federally supported or regulated research and other types of privately funded research choose to apply the requirements uniformly to all studies involving human subjects, regardless of the source of funding. However, some other organizations that carry out both publicly and privately funded research apply the federal rules where required, often relying on IRB review at collaborators' institutions, but do not apply the rules to their privately funded research. Pharmaceutical and biotechnology companies, for example, rely on the academic medical centers where they sponsor research to have in place procedures for informed consent and IRB review, but they do not maintain their own IRBs. Some organizations conduct certain activities that involve identifiable medical information, but they do not define these activities as research. For example, officials at several MCOs told us that they did not define records-based quality improvement activities as research, so these projects are not submitted for IRB review. But there is disagreement as to how to classify quality improvement reviews, and some organizations do submit these studies for IRB review, where they define the studies as research. Finally, at some organizations, none of the research is covered by the Common Rule or FDA regulations and no research receives IRB review. For example, one PBM in our study, which conducts research for other companies--including developing disease management programs--does not receive federal support and, thus, is not subject to the Common Rule in any of its research. While it does not have an IRB, this PBM uses external advisory boards to review its research proposals. Another type of research that for some companies does not fall under the Common Rule or FDA regulations is research that uses disease or population-related registry data. Pharmaceutical and biotechnology companies maintain such registries to monitor how a particular population responds to drugs and to better understand certain diseases. While many organizations have in place IRB review procedures, recent studies that pointed to weaknesses in the IRB system, as well as the provisions of the Common Rule itself, suggest that IRB reviews do not ensure the confidentiality of medical information used in research. While not focusing specifically on confidentiality, previous studies by GAO and by the Department of Health and Human Services (HHS) Office of Inspector General have found multiple factors that weaken institutional and federal human subjects protection efforts. In 1996, we found that IRBs faced a number of pressures that made oversight of research difficult, including the heavy workloads of and competing professional demands on members who are not paid for their IRB services. Similarly, the Inspector General found IRBs unable to cope with major changes in the research environment, concluding that they review too many studies too quickly and with too little expertise, and recommended a number of actions to improve the flexibility, accountability, training, and resources of IRBs. Under the Common Rule, IRBs are directed to approve research only after they have determined that (1) there are provisions to protect the privacy of subjects and maintain the confidentiality of data, when appropriate, and (2) research subjects are adequately informed of the extent to which their data will be kept confidential. However, according to the Director of the Office for Protection From Research Risks (OPRR), confidentiality protection is not a major thrust of the Common Rule and IRBs tend to give it less attention than other research risks because they have the flexibility to decide when it is appropriate to review confidentiality protection issues. Consistent with federal regulations, the seven IRBs that we contacted told us that they generally waive the informed consent requirements in cases involving medical records-based research. Researchers at the organizations we visited contend that it is often difficult, if not impossible, to obtain the permission of every subject whose medical records are used. As an example, the director of research at one integrated health system described a study that tracked about 30,000 patients over several years to determine hospitalization rates for asthmatic patients treated with inhaled steroids. The IRBs that we contacted told us that they routinely examine all research plans using individually identifiable medical information to determine whether the research is exempt from further review, can receive an expedited review, or requires a full review. Further, in reviewing research using individually identifiable genetic data, two of the IRBs had policies to consider additional confidentiality provisions in approving such research. The actual number of instances in which patient privacy is breached is not fully known. While there are few documented cases of privacy breaches, other reports provide evidence that such problems occur. For example, in an NIH-sponsored study, IRB chairs reported that lack of privacy and lack of confidentiality were among the most common complaints made by research subjects. Over the past 8 years, OPRR's compliance staff has investigated several allegations involving human subjects protection violations resulting from a breach of confidentiality. In the 10 cases provided to us, complaints related both to research subject to IRB review and to research outside federal protection. In certain cases involving a breach in confidentiality, OPRR has authority to restrict an institution's authority to conduct research that involves human subjects or to require corrective action. For example, in one investigation, a university inadvertently released the names of participants who tested HIV positive to parties outside the research project, including a local television station. In this case, OPRR required the university to take corrective measures to ensure appropriate confidentiality protections for human subjects. In response, the university revised internal systems to prevent the release of private information in the future. However, in other cases, OPRR determined that it could not take action because the research was not subject to the Common Rule and, thus, it lacked jurisdiction. For example, in a case reported in the media, OPRR staff learned of an experiment that plastic surgeons had performed on 21 patients using two different facelift operations--one on each half of the face--to see which came out better. OPRR staff learned that the study was not approved by an IRB and that the patients' consent forms did not explain the procedures and risks associated with the experiment. In addition, the surgeons published a journal article describing their research that included before and after photographs of the patients. Because the research was performed in physician practices and was not federally supported, it fell outside the Common Rule and OPRR could take no action. Each organization that we contacted reported that it has taken one or more steps to limit access to personally identifiable information in their research. Many have limited the number of individuals who are afforded access to personally identifiable information or limited the span of time they are given access to the information, or both. Some have used encrypted or encoded identifiers to enhance the protection of research and survey subjects. Most, but not all, of the organizations have additional management practices to protect medical information, including written policies governing confidentiality. Some organizations have also instituted a number of technical measures and physical safeguards to protect the confidentiality of information. Officials from two of the companies that we contacted told us that they did not have written policies to share with us, and two other companies were unable to provide us with such documentation, although officials described several practices related to confidentiality. The organizations that did provide us with documentation appear to use similar management practices and technical measures to protect health information used in their health research, whether they generate patient records or receive them from other organizations. relevant to their studies. In addition to limiting access to certain individuals for specific purposes, some organizations have encrypted or encoded patient information. Researchers at one integrated health system, for example, work with information that has been encoded by computer programmers on the research team--the only individuals who have access to the fully identifiable data. In conducting collaborative research, the organizations that we contacted tend to use special data sets and contracting processes to protect medical information. For example, one MCO, which conducts over half of its research with government agencies and academic and research institutions, transfers data in either encrypted or anonymized form and provides detailed specifications in its contracts that limit use of the data to the specific research project and prohibit collaborators from re-identifying or transferring the data. Generally, company policies define the circumstances under which personally identifiable information may be disclosed and the penalties for unauthorized release of confidential information. Most company policies permit access only to the information that is needed to perform one's job; 8 of the 12 organizations also require their employees to sign agreements stating that they will maintain the privacy of protected health information. Each organization that we contacted said it uses disciplinary sanctions to address employee violations of confidentiality or failure to protect medical information from accidental or unauthorized access, and an intentional breach of confidentiality could result in employee termination--which may be immediate. But they also pointed out that few employees have been terminated, and when they have, the incidents were not related to the conduct of research. The organizations that we contacted said they use a number of electronic measures to safeguard their electronic health data. Most reported using individual user authentication or personal passwords to ensure users access only the information that they need; some also use computer systems that maintain an electronic record of each employee who accesses medical data. These organizations may also use other technical information system mechanisms, including firewalls, to prevent external access to computer systems. In addition to electronic security, officials at some of the organizations told us they use various security measures to prevent unauthorized physical access to medical records-based information, including computer workstations and servers. Personally identifiable information is often an important component of research using medical records, and the companies we met with furnished many examples of useful research that could not have been conducted without it. Because our study focused on only a limited number of companies--in particular, those that were willing to share information about corporate practices--it is difficult to judge the extent to which their policies may be typical, nor do we know the extent to which their policies are followed. Nevertheless, most of the organizations we surveyed do have policies to limit and control access to medical information that identifies individuals, and many of them have adopted techniques, such as encryption and encoding, to further safeguard individual privacy. However, while reasonable safeguards may be in place in these companies, external oversight of their research is limited. Not all research is subject to outside review, and even in those cases where IRBs are involved, they are not required to give substantial attention to privacy protection. Further, in light of the problems that IRBs have had in meeting current workloads--one of the key findings of our earlier work as well as the work of HHS' Office of Inspector General--it is not clear that the current IRB-based system could accommodate more extensive review responsibilities. In weighing the desirability of additional oversight of medical records-based research, it will be important to take account of existing constraints on the IRB system and the recommendations that have already been made for changes to that system. This concludes my prepared statement. I will be happy to respond to any questions that you or Members of the Committee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the privacy of medical records used for health research, focusing on: (1) to what extent medical information used for research depends on personally identifiable information; (2) research that is and is not subject to current federal oversight requirements; (3) how the institutional review board (IRB) ensures the confidentiality of health information used in research; and (4) what steps organizations have taken to safeguard information. GAO noted that: (1) the survey revealed that a considerable amount of health research relies on personally identifiable information; (2) while some of this research is subject to IRB review--either because it is federally supported or regulated research or because the organization voluntarily applies federal rules to all of its research--some of the organizations conduct records-based research that is not reviewed by an IRB; (3) the process of IRB review does not ensure the confidentiality of medical information used in research--primarily because the provisions of the Common Rule related to confidentiality are limited; (4) according to recent studies, the IRB system on the whole is strained; and (5) nevertheless, although external review of their research is limited, most of the organizations in GAO's study told GAO that they have various security safeguards in place to limit internal and external access to paper and electronic databases, and many say they have taken measures to ensure the anonymity of research and survey subjects.